DRS/A 1 filename1.htm

 

As confidentially submitted to the United States Securities and Exchange Commission on December 22, 2017. This draft registration statement has not been publicly filed with the United States Securities and Exchange Commission and all information herein remains strictly confidential.

 

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

Confidential Draft

Submission No. 3

 

Form F-1

Registration Statement

Under the Securities Act of 1933

 

 

 

BIOFRONTERA AG

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Federal Republic of Germany   2834   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

 

Hemmelrather Weg 201

D-51377 Leverkusen Germany

Telephone: 011 49 214 876 00

 

(Address, including zip code, and telephone number, including area code, of

Registrant’s principal executive offices)

 

Biofrontera Inc.

201 Edgewater Dr.

Wakefield, MA 01880

Telephone: 781 245 1325

(Name, address, including zip code, and telephone number, including areas code,

of agent for service)

  

 

 

Copies to:

 

Seth T. Goldsamt

Stephen E. Older

McGuireWoods LLP

1345 Avenue of the Americas

7th Floor

New York, NY 10105

Telephone: 212 548 2100

Facsimile: 212 715 6267

 

Ralph V. De Martino

F. Alec Orudjev

Schiff Hardin LLP

901 K Street NW

Suite 700

Washington, DC 20001
Telephone: 202 778 6400

Facsimile: 202 778 6460

 

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Registration Statement.

 

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. ¨

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. Emerging growth company þ

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of
securities to be registered(1)
  Amount to be
registered(2)
  Proposed maximum
offering price per
security(3)
  Proposed maximum aggregate
offering price(3)
  Amount of
registration
fee
Ordinary Shares with no par value; €1.00 nominal value per
share
   [____]   $[____]   $ [____]   $000 

 

(1) American Depositary Shares, or ADSs, issuable upon deposit of the ordinary shares registered hereby are being registered pursuant to a separate Registration Statement on Form F-6. Each ADS represents [two] ordinary shares.

(2) Includes ordinary shares that may be purchased pursuant to the underwriters’ over-allotment option. See “Underwriting.”

(3) We currently estimate that the initial public offering price will be between $[____] and $[_____] per ADS. Estimated pursuant to Rule 457(c) solely for the purposes of calculating the registration fee based on the average of the high and low price per ordinary share as reported by the Frankfurt Stock Exchange on [        ] translated into U.S. dollars based on the noon buying rate on [      ] of [     ] per euro.

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the Registration Statement filed with the United States Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

(Subject to Completion) Dated [     ], 2017

 

American Depositary Shares Representing [     ] Ordinary Shares

 

 

BIOFRONTERA AG

 

 

 

This is an initial public offering of [___] American Depositary Shares, or ADSs, each representing [two] ordinary shares, nominal value €1.00 per share, of Biofrontera AG, a German stock corporation. Separate from this offering, we expect to make a concurrent preemptive rights offering of our ordinary shares pursuant to German law to our existing holders of ordinary shares. The price per share at which our shares will be offered in the German preemptive rights offering will be the same as the price per ADS at which the ADSs are being offered in the U.S. offering (adjusting for the euro/U.S. dollar exchange rate and the ratio of ordinary shares to ADSs). We have excluded shareholders’ subscription rights for a residual amount of [___] newly issued shares in accordance with German law and our articles of association. In addition, those new shares as to which subscription rights have been excluded or not exercised during the subscription period will be offered in this offering of ADSs.

 

We currently estimate that the initial public offering price will be between $[__] and $[__] per ADS. Prior to this offering, there has been no public market in the United States, or U.S., for our ordinary shares or ADSs. Our ordinary shares are listed on the Frankfurt Stock Exchange under the symbol “B8F”, and application has been made for the listing of the ADSs on The NASDAQ Capital Market under the symbol “BFRA”. We believe that upon the completion of the offering contemplated by this prospectus, we will meet the standards for listing on The NASDAQ Capital Market. On [___], 2017, the closing price of our ordinary shares on the Frankfurt Stock Exchange was €[___] ($[___], based upon the noon buying rate of the Federal Reserve Bank of New York for the euro on that date, which was €1.00 to $[___]) per share.

 

We are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act of 2012 and as such, will be subject to reduced public company reporting requirements for this prospectus and future filings.

 

Investing in our securities involves risk. See "Risk Factors" beginning on page 20 to read about factors you should consider before buying our ADSs.

 

 

 

None of the U.S. Securities and Exchange Commission, any U.S. state securities commission or any foreign securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

   Per ADS  Total
Initial public offering price  $   $ 
Underwriting discount and commissions1  $   $ 
Proceeds, before expenses, to Biofrontera  $   $ 

 

To the extent that the underwriters sell more than [     ] ADSs, the underwriters have the option to purchase up to an additional [     ] ADSs at the same price per ADS as paid for the ADSs offered hereby, for 45 days after the date of this prospectus.

  

 

 

The underwriters expect to deliver the ADSs against payment in New York, New York on [                    ], 2017.

 

The Benchmark Company, LLC is acting as representative for the underwriters in connection with this offering. An affiliate and a principal of The Benchmark Company, LLC holds a position as a member of the supervisory board of our company. Therefore, The Benchmark Company, LLC is deemed to have a “conflict of interest” under Rule 5121(f)(5) of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Accordingly, this offering will be conducted in accordance with the applicable provisions of Rule 5121, which requires, among other things, that a “qualified independent underwriter” participate in the preparation of, and exercise the usual standards of “due diligence” with respect to, the registration statement and this prospectus. Dawson James Securities, Inc. has agreed to act as a “qualified independent underwriter” within the meaning of Rule 5121 in connection with this offering.

 

Benchmark

 

 

 

Dawson James Securities, Inc. Lake Street Capital Markets

 

 

 

Prospectus dated [      ].

 

 

1 See "Underwriting" for additional information regarding underwriting compensation.

 

 2 

 

  

 

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TABLE OF CONTENTS

 

  Page
   
Prospectus Summary 6
Risk Factors 20
Special Note Regarding Forward Looking Statements 54
Exchange Rates 55
Use of Proceeds 56
Dividend Policy and Liquidation Proceeds 57
Trading Markets 58
Capitalization 59
Dilution 61
Selected Consolidated Financial Data 63
Management's Discussion and Analysis of Financial Condition and Results of Operations 64
Business 83
Management 120
Certain Relationships and Related Party Transactions 137
Principal Shareholders 139
Description of Share Capital 141
Description of American Depositary Shares 149
Shares and ADSs Eligible for Future Sale 156
Exchange Controls and Limitations Affecting Shareholders 157
Certain Material U.S. Federal Income and German Tax Considerations 158
Underwriting (Conflicts of Interest) 167
Expenses of this Offering 170
Legal Matters 170
Experts 171
Service of Process and Enforcement of Civil Liabilities 171
Where You Can Find More Information 171
Index to Financial Statements F-1

 

You should rely only on the information contained in this prospectus and any related free-writing prospectus that we authorize to be distributed to you. We and the underwriters have not authorized any person to provide you with information different from that contained in this prospectus or any related free-writing prospectus that we authorize to be distributed to you. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state or other jurisdiction where the offer or sale is not permitted. The information in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies, regardless of the time of delivery of this prospectus or of any sale of the securities offered hereby.

 

Unless otherwise indicated, all references in this prospectus to "Biofrontera", "we", "us", or "company" refer to Biofrontera AG and its consolidated subsidiaries, Biofrontera Pharma GmbH, Biofrontera Bioscience GmbH, Biofrontera Neuroscience GmbH, Biofrontera Development GmbH and Biofrontera Inc.

 

No action is being taken in any jurisdictions outside the United States to permit a public offering of the American Depositary Shares, or ADSs, or possession or distribution of this prospectus in such jurisdictions. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of the prospectus applicable to such jurisdictions.

 

Until [________] (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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TRADEMARKS

 

We own or have rights to trademarks and trade names that we use in connection with the operation of our business, including our corporate name, logos, product names and website names. Other trademarks and trade names appearing in this prospectus are the property of their respective owners. Solely for your convenience, some of the trademarks and trade names referred to in this prospectus are listed without the® and TM symbols, but we will assert, to the fullest extent under applicable law, our rights, or the rights of the applicable licensor, to our trademarks and trade names.

 

PRESENTATION OF FINANCIAL INFORMATION

 

Unless otherwise indicated, the consolidated financial statements and related notes included in this prospectus have been presented in euros, or €, and also comply with the International Financial Reporting Standards, or IFRS (“IFRS”), as issued by the International Accounting Standards Board, or IASB (“IASB”). None of the consolidated financial statements in this prospectus were prepared in accordance with United States generally accepted accounting principles. For any of our subsidiaries that use a functional currency that is not euros, the assets and liabilities have been translated at the closing exchange rate as of the relevant balance sheet date (six months ended June 30, 2017: 1.14227 U.S. dollars to 1 euro; June 30, 2016: 1.11038 U.S. dollars to 1 euro), while the income and expenses have been translated at the average exchange rates (six months ended June 30, 2017: 1.08200 U.S. dollars to 1 euro; June 30, 2016: 1.11603 U.S. dollars to 1 euro) applicable to the relevant period. The differences resulting from the valuation of equity at historical rates and applying the period-end exchange rates are reported as a change not affecting profit or loss and carried directly to equity within the other equity components. Transactions realized in currencies other than euros are reported using the exchange rate on the date of the transaction. Assets and liabilities are translated applying the closing exchange rate for each balance sheet date. Gains and losses arising from such currency translations are recognized in income. See “Summary of Significant Accounting Policies — Translation of Amounts in Foreign Currencies” in the notes to our consolidated financial statements included elsewhere in this prospectus for more information.

 

Certain information in this prospectus is expressed in U.S. dollars. The noon buying rate of the Federal Reserve Bank of New York for the euro on [_________], 2017 was €1.00 to $[___]. We make no representation that the euro or U.S. dollar amounts referred to in this prospectus could have been converted into U.S. dollars or euros, as the case may be, at any particular rate or at all. See "Risk Factors — Our international operations may pose currency risks, which may adversely affect our operating results and net income." We use the symbol "$" to refer to the U.S. dollar and use the symbol "€" to refer to the euro herein.

 

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PROSPECTUS SUMMARY

 

This summary highlights selected information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our ADSs. You should read this entire prospectus carefully, including "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations", and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus, before making an investment decision.

 

Overview

Our Company

 

We are an international biopharmaceutical company specializing in the development and commercialization of a platform of pharmaceutical products for the treatment of dermatological conditions and diseases caused primarily by exposure to sunlight that results in sun damage to the skin. Our approved products focus on the treatment of actinic keratoses, which are skin lesions that can sometimes lead to skin cancer, in the U.S. and Europe, as well as the treatment of basal cell carcinoma in the EU. Actinic keratoses typically appear on sun-exposed areas, such as the face, bald scalp, arms or the back of the hands, and are often elevated, flaky, and rough in texture, and appear on the skin as hyperpigmented spots. Because of their location and appearance, actinic keratoses are often cosmetically unappealing.

 

Our principal product is Ameluz®, which is a prescription drug approved for use in combination with photodynamic therapy, or PDT, which we sometimes refer to as Ameluz® PDT. Ameluz® PDT received centralized European approval in 2011 from the European Commission for the treatment of actinic keratosis of mild to moderate severity on the face and scalp. Since the initial centralized European approval of Ameluz® PDT, the European Commission granted label extensions for the use of Ameluz® PDT for (i) the treatment of field cancerization, or larger areas of skin on the face and scalp with multiple actinic keratoses and (ii) the treatment of superficial and/or nodular basal cell carcinoma unsuitable for surgical treatment due to possible treatment-related morbidity and/or poor cosmetic outcome. A major advantage of treating actinic keratosis and basal cell carcinoma with photodynamic therapy (as opposed to other common treatments such as simple curettage and cryotherapy) is that it is a non-invasive alternative that can have better cosmetic results, i.e., removal of tumors without leaving clearly visible scarring.

 

In addition, we have developed our own PDT lamp, BF-RhodoLED®, for use in combination with Ameluz®. Our BF-RhodoLED® lamp was approved as a medical device in the EU in November 2012 and is approved for sale in all EU countries, although the use of our BF-RhodoLED® lamp is not required to be used in combination with Ameluz® in the EU or Switzerland.

 

In May 2016, we received approval from the U.S. Food and Drug Administration, or the FDA, to market in the U.S. Ameluz® in combination with photodynamic therapy using our BF-RhodoLED® lamp for lesion-directed and field-directed treatment of actinic keratoses of mild-to-moderate severity on the face and scalp. We launched the commercialization of Ameluz® and BF-RhodoLED® for actinic keratosis in the U.S. in October 2016.

 

We currently sell Ameluz® in the U.S., in 11 countries in Europe and in Israel.

 

Dermatological Conditions and Diseases that are Treated by Our Products

 

Ameluz® PDT is approved for the treatment of actinic keratosis on the face and scalp in the U.S. and Europe and certain types of basal cell carcinoma in the EU. It is an alternative to more invasive treatments, such as cryotherapy or simple curettage.

 

Actinic keratoses are superficial, potentially pre-cancerous skin lesions caused by chronic sun exposure that may, if left untreated, develop into a form of potentially life-threatening skin cancer called squamous cell carcinoma. Actinic keratosis is more common in men than women, and much more common in people over 40 years of age. Actinic keratoses are more likely to develop in people with fair skin and a history of sunburn. They are especially prevalent in geographical areas with sunny climates.

 

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According to The Skin Cancer Foundation (SCF), if left untreated, up to 1% of actinic keratosis lesions develop into squamous cell carcinomas every year. Squamous cell carcinoma has been the second most common form of skin cancer, but its incidence has been rapidly increasing. According to the SCF, more than one million cases of squamous cell carcinoma are diagnosed each year in the U.S., and it has been estimated that as many as 8,800 people die from the disease each year in the U.S. Incidence of the disease has increased by 200 percent in the past three decades in the U.S. and it has recently matched the incidence of basal cell carcinoma in the Medicare fee-for-service population, which had been the most common form of human cancers.

 

Because actinic keratosis can develop into squamous cell carcinomas, actinic keratosis is classified by The European Academy of Dermatology and Venereology and other international treatment guidelines as a tumor that requires treatment, and the international treatment guidelines list photodynamic therapy as the “gold standard” for the removal of actinic keratoses, particularly for patients with large keratotic areas.

 

Squamous cell carcinoma is an uncontrolled growth of abnormal cells arising in the squamous cells, which compose most of the skin’s upper layers (the epidermis). Squamous cell carcinoma often appear as scaly red patches, open sores, elevated growths with a central depression, or warts; and they may crust or bleed. They can become disfiguring and sometimes deadly if allowed to grow.

 

Basal cell carcinomas are abnormal, uncontrolled growths or lesions that arise in the skin’s basal cells, which line the deepest layer of the epidermis (the outermost layer of the skin). Basal cell carcinomas often appear as open sores, red patches, pink growths, shiny bumps or scars and are typically caused by accumulated sun exposure. Basal cell carcinomas are the most common invasive tumors affecting humans, accounting for approximately 80 percent of all non-melanoma skin cancers worldwide. More than 4 million cases of basal cell carcinoma are diagnosed in the U.S. each year. Although basal cell carcinoma rarely spreads to other parts of the body and becomes life-threatening, it can be disfiguring if not treated promptly.

 

The Limitations of Competing Treatment Regimes

 

Actinic keratoses are treated using a wide range of methods. The traditional methods of treating actinic keratoses are:

 

·cryotherapy, or the deep freezing of skin;

 

·self-applied topical prescription products;

 

·combination of medication with photodynamic therapy; and

 

·simple curettage, or the surgical removal of tissue by means of scraping with a curette.

 

Although any of these methods can be effective, each has limitations and can result in significant side effects.

 

Cryotherapy is non-selective (i.e., it cannot target specific tissues, but affects all tissues in the area of application), can be painful at the site of freezing, and can cause blistering and loss of skin pigmentation, leaving temporary or permanent white spots. In addition, because there is no standardized treatment protocol, results are not uniform and can depend on the skill or technique of the doctor treating the patient.

 

Topical prescription products include 5-fluorouracil cream, or 5-FU, which can be irritating and requires twice-a-day application by the patient for approximately 2 to 4 weeks, resulting in inflammation, redness and erosion or rawness of the skin. Following the treatment, up to several weeks of healing may be required. Imiquimod or diclofenac, other topical prescription products, require extended applications of cream, lasting up to 3 or 4 months, during which the skin is often very red and inflamed. Treatment with ingenol mebutate is faster, requiring application for only a few days, but side effects can be long-lasting and this drug has been labeled with a black-box warning by the FDA (a warning that appears on a prescription drug’s label and is designed to call attention to serious or life-threatening risks).

 

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Simple curettage is generally most useful for one or a few individual lesions, but not for a large number of lesions, and it leaves permanent scars.

 

Other approved drugs used in combination with photodynamic therapy (PDT) are Levulan® in the U.S. and Metvix®/Metvixia® and AlaCare® in the EU. Levulan and AlaCare® contain 5-aminolevulinic acid (5-ALA) as its active ingredient and Metvix contains methylesther as its active ingredient. Metvix is metabolized to 5-ALA in the tissue, after which the method of action is identical to Levulan. In the U.S., Levulan PDT is approved for treatment of actinic keratosis with a blue light source and, in the EU, Metvix PDT is approved for treatment of actinic keratosis with a red light source. AlaCare® is a 2x2 cm medicated plaster, which is also approved for treatment of actinic keratosis with red light. As with Ameluz®, in the treatment of actinic keratosis, both Levulan and Metvix are used in a PDT treatment once, and the PDT treatment is repeated after several weeks if residual lesions remain. AlaCare® is approved for single use treatment of mild actinic keratosis lesions with a maximum diameter of 1.8 cm on the face and scalp (hairless area).

 

In the U.S., our approved treatment method involves applying Ameluz® gel to individual or entire fields of actinic keratosis lesions, followed three hours later with exposure to our red light BF-RhodoLED® lamp for approximately ten minutes. In the EU, Ameluz® is also indicated for field cancerization and for superficial and/or nodular basal cell carcinoma unsuitable for surgical treatment due to possible treatment-related morbidity and/or poor cosmetic outcome. In our Phase III trials, our treatment produced varying degrees of pain during light treatment, but the therapy was generally well tolerated. The resulting redness and/or inflammation resolved within 1 to 4 days in most cases; in some cases, however, it persisted for 1 to 2 weeks or even longer.

 

We believe Ameluz® PDT is a preferable treatment for actinic keratosis compared to non-PDT competing treatment regimes for a number of reasons, including: (i) Ameluz® PDT does not result in significant scarring (as compared to cryotherapy or simple curettage), (ii) skin appearance is typically improved for at least 12 months after treatment and (iii) a patient’s healing is typically completed within 1-2 days of treatment.

 

The most common treatment for basal cell carcinoma in the EU and U.S. is surgical removal. In many European countries, dermatology specialists are hospital-based and, as a result, basal cell carcinoma is most commonly treated in European countries by hospital surgery, which is rarely the case for actinic keratosis. The treatment of basal cell carcinoma by a surgical procedure can result in high cost and clearly visible scarring. But thin, non-aggressive basal cell carcinomas can also be treated with photodynamic therapy, such as Ameluz® PDT. The advantage of treating basal cell carcinoma with photodynamic therapy is that it is a non-invasive alternative that can have better cosmetic results, i.e., removal of tumors without leaving clearly visible scarring. It is also available for patients who are at risk of surgery-related morbidity.

 

Our Strategy

 

Our principal objectives are to obtain regulatory approvals for the marketing of Ameluz® PDT for additional indications and in additional countries, and to increase the sales of our approved products. The key elements of our strategy include the following:

 

·geographic expansion of Ameluz® sales worldwide, including by:

 

·expanding our sales in the U.S. of Ameluz® in combination with our BF-RhodoLED® light device for the treatment of actinic keratosis and positioning Ameluz® to be a leading photodynamic therapy product in the U.S., by growing our dedicated sales and marketing infrastructure in the U.S.;

 

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·expanding our sales in the EU of Ameluz® by marketing it for the treatment not only of actinic keratosis, but also for the treatment of field cancerization (larger skin areas containing potentially pre-cancerous cells and multiple actinic keratosis lesions) and basal cell carcinoma, indications for which we recently obtained approval; and

 

·expanding our sales of Ameluz® in other countries where it is an approved product by entering into arrangements with distribution partners;

 

·extending the approved indications for Ameluz® photodynamic therapy, including by:

 

·seeking to extend the approved label for actinic keratosis to include actinic keratosis lesions located other than on the head or scalp and increase the maximal size of the treatment field;

 

·seeking to extend the approved indications in the U.S. for Ameluz® in combination with our BF-RhodoLED® light device for the treatment of basal cell carcinoma;

 

·seeking to extend the approved indications in the EU for Ameluz® to include treatment for actinic keratosis with Ameluz® in combination with daylight photodynamic therapy, or exposure to sunlight, an indication for which we have recently applied in the EU and which we believe may increase the market potential of Ameluz® in such region (since Ameluz® could be used without doctor’s office procedures, which procedures can render photodynamic therapy treatment in European markets commercially unattractive due to lack of reimbursement); and

 

·seeking to extend the approved indications in the EU and U.S. for Ameluz® to additional indications, such as squamous cell carcinoma in situ, actinic cheilitis, acne, warts, wound healing, and/or cutaneous leichmania; all of which would require further clinical trials, and other research and development activities.

 

We also plan to develop additional drug candidates and seek partnerships or other opportunities for drug development collaborations, such as our collaboration and partnership agreement with Maruho Co., Ltd., or Maruho, a major shareholder of our company, and to continue to develop and expand marketing and sales of our cosmetic skin care products.

 

Risk Factors

 

Our business is subject to numerous risks and uncertainties, including those highlighted in "Risk Factors" immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

·We have a history of operating losses and anticipate that we will continue to incur operating losses in the future and that we may never sustain profitability.
·If we fail to obtain additional financing, we may be unable to complete the development and commercialization of our products and product candidates.
·Our existing and any future indebtedness could adversely affect our ability to operate our business.
·Certain of our important patents will expire in 2019. Although the process of developing generic topical dermatological products presents specific challenges that may deter potential generic competitors, generic versions of Ameluz® could enter the market after expiration of these patents. If this happens, we may need to reduce the price of Ameluz® significantly and may lose significant market share.
·Insurance coverage and medical expense reimbursement may be limited or unavailable in certain market segments for our products or product candidates, which could make it difficult for us to sell our products.
·To date, we have engaged in only limited sales of our products, primarily in Germany and Spain and, more recently, in the U.S.
·We face significant competition from other pharmaceutical and medical device companies and our operating results will suffer if we fail to compete effectively. We have recently lost market share in Germany to daylight PDT products, an indication for which we have applied but for which Ameluz® is not currently approved.

 

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·We depend on a single unaffiliated contract manufacturer to manufacture Ameluz®. If we fail to maintain our relationship with this manufacturer or if that manufacturer is unable to continue to produce product for us, our business could be materially harmed.
·Even if we obtain regulatory approvals for our products and product candidates, they may not gain market acceptance among hospitals, physicians, health care payors, patients and others in the medical community.
·With respect to our already approved products, we may be subject to healthcare laws, regulation and enforcement. Our failure to comply with those laws could have a material adverse effect on our results of operations and financial condition.
·A recall of our drug or medical device products, or the discovery of serious safety issues with our drug or medical device products, could have a significant negative impact on us.
·We will need to grow the size of our organization and we may experience difficulties in managing this growth.
·Our international operations may pose currency risks, which may adversely affect our operating results and net income.
·Our business depends substantially on the success of our principal product Ameluz®. If we are unable to successfully commercialize Ameluz®, to obtain and maintain regulatory approvals or reimbursement for Ameluz® for existing and additional indications and/or in additional countries, or if we experience significant delays in realizing any of those commercialization or product development objectives, our business may be materially harmed.
·Clinical drug development is expensive and involves uncertain outcomes, and results of earlier studies and trials may not be predictive of future trial results. If one or more future Phase III clinical trials for Ameluz® were unsuccessful, or significantly delayed, we could be required to abandon development, we may suffer reputational harm and our business will be materially harmed.
·We will be subject to ongoing regulatory requirements in every market where we engage in business and we may face future development, manufacturing and regulatory difficulties.
·If our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, we may not be able to compete effectively in our market.
·We may be involved in lawsuits to defend or enforce our patents, which could be expensive, time-consuming and unsuccessful.

 

Corporate History and Information

 

Our company was formed in 1997 by Professor Hermann Lübbert, Ph.D., who currently serves as chairman of our management board and our chief executive officer, as a limited liability company (Gesellschaft mit beschränkter Haftung or GmbH) under German law and under the name “BioFrontera Laboratories GmbH” to provide services to the pharmaceutical industry.

 

In September 1997, the company was renamed “BioFrontera Pharmaceuticals GmbH” and commenced its current operations, which include the development, marketing, sales, manufacturing and distribution of drugs and medical devices, cosmetics, and other dermatology-related products. On August 24, 2000, our company was converted into a German stock corporation (Aktiengesellschaft or AG), and on November 27, 2003, our company was renamed “Biofrontera AG”.

 

Our company's principal executive offices are located at Hemmelrather Weg 201, D-51377 Leverkusen, Germany and our telephone number is 011 49 214 876 00. Our website address is www.biofrontera.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase our ADSs. Our agent for service of process in the U.S. is Biofrontera Inc., 201 Edgewater Dr., Wakefield, Massachusetts 01880, U.S. Our ordinary shares have been listed on the Stock Exchange in Düsseldorf since 2006 and on the Frankfurt Stock Exchange under the ticker symbol “B8F” since 2012.

 

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Implications of Being a Foreign Private Issuer

 

We will qualify as a "foreign private issuer" as defined in Section 405 of the Securities Act of 1933, as amended, or the Securities Act. As a foreign private issuer, we are exempt from certain rules under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that impose disclosure requirements as well as procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and "short-swing" profit recovery provisions of Section 16 of the Exchange Act. Moreover, we are not required to file periodic reports and financial statements with the U.S. Securities and Exchange Commission, or the SEC, as frequently or as promptly as a company that files as a domestic issuer whose securities are registered under the Exchange Act, nor are we generally required to comply with the SEC's Regulation FD, which restricts the selective disclosure of material non-public information. We intend to take advantage of these exemptions as a foreign private issuer. See "Risk Factors — As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than U.S. companies. This may limit the information available to holders of ADSs.”

 

Implications of Being an Emerging Growth Company

 

We are an "emerging growth company" as that term is defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These reduced reporting requirements include:

 

·an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal controls over financial reporting;

 

·reduced disclosure about our executive compensation arrangements; and

 

·an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or stockholder approval of any golden parachute arrangements.

 

We have elected to take advantage of the scaled disclosure requirements and other relief described above in this prospectus and may take advantage of these exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until the earliest to occur of: (i) the last day of the fiscal year following the fifth anniversary of this offering; (ii) the last day of the fiscal year in which our annual gross revenue is $1,070,000,000 or more; (iii) the date on which we have, during the previous three-year period, issued more than $1,000,000,000 in non-convertible debt securities; or (iv) as of the end of any fiscal year in which the market value of our ordinary shares held by non-affiliates is $700,000,000 or more as of the end of the second quarter of that fiscal year. We may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock. See "Risk Factors — We are an emerging growth company, and we cannot be certain that the reduced reporting requirements applicable to emerging growth companies will not make our ADSs less attractive to investors.”

 

Recent Developments

  

Set forth below is certain limited unaudited financial information as of and for the three months and nine months ended September 30, 2017. In connection with our listing on the Frankfurt Stock Exchange, we published substantially all of this financial information in an announcement issued on November 26, 2017. This financial information has been prepared under IFRS as adopted by the EU. No material differences are believed to exist between the presented financial information in accordance with IFRS as adopted by the EU and IFRS as issued by the IASB.

 

Key figures

 

   For the Nine Months ended
September 30,
   For the Three Months
ended September 30,
 
In €thousands (unless stated otherwise)  2017   2016   2017   2016 
Sales revenue   7,334.0    2,881.4    2,327.6    1,172.8 
Research and development costs   (3,232.9)   (3,358.4)   (1,047.5)   (1,506.4)
Sales costs   (12,586.1)   (4,937.4)   (4,310.8)   (2,105.1)
General administrative costs   (3,625.9)   (2,080.8)   (1,930.3)   (708.4)
Profit/loss for the period   (13,730.1)   (7,163.1)   (5,589.4)   (3,691.5)
                     
Cash flows used in operational activities   (12,313.7)   (6,885.0)   (4,226.8)   (4,374.3)
Cash flows provided by financing activities   10,740.7    8,867.1    6,136.1    (0.3)
Cash and cash equivalents   13,307.3    5,733.3    13,307.3    5,733.3 
                     
Employees (number, end of period)   125    81    125    81 
                     
Shares outstanding (number, end of period)   38,416,503    30,347,813    38,416,503    30,347,813 
Share price (closing Xetra, end of period in EUR)   3.51    3.02    3.51    3.02 

 

As compared with the nine-month period ended September 30, 2016, our sales revenue increased by 154.5% to €7.3 million, driven primarily by the successful market launch of Ameluz® in the U.S. During the first nine months of 2017, we expanded our marketing efforts in the U.S. by expanding our U.S. team from 24 to 45 staff in the areas of field sales, medical and support and management. In August, we integrated our marketing and sales support areas into Biofrontera Inc., which we believe will enable us to offer our customers cost-efficient support at a high level. In September, we appointed Jeffrey Holm, an experienced marketing manager with a broad network in the U.S. dermatology market, to be Vice President Marketing. Our U.S. customer base currently includes over 500 dermatology practices. We expect the process of claiming reimbursement for Ameluz® will become easier once the permanent J-code for Ameluz® becomes effective in January 2018, which we expect will have a positive effect on our sales and revenue.

 

Results of operations

 

Sales revenue

 

We generated total sales revenue of €7.3 million in the first nine months ended September 30, 2017, representing an increase of 154.5% year-on-year. Sales revenue in Germany amounted to €1.7 million, reflecting a slight rise of €185 thousand compared with nine months ended September 30, 2017. Revenue generated outside of Germany performed well in the first nine months of 2017, driven primarily by increased sales in the U.S. amounting to €3.4 million. In Europe, sales revenue increased by 61% to €1.2 million. Development projects with Maruho generated sales revenue of €1.1 million in the nine months ended September 30, 2017 as compared with €613 thousand in the nine months ended September 30, 2016.

 

Operating costs

 

Research and development costs for the nine months ended September 30, 2017 were €3.2 million, a decrease of €125 thousand, or 4 %, as compared with nine months ended September 30, 2016.

 

Sales costs for the nine months ended September 30, 2017 were €12.6 million, an increase €7.7 million, or 155%, compared with the nine months ended September 30, 2016. This increase was driven primarily by increased marketing and sales expenses in the U.S.

 

 11 

 

 

General administrative costs for the nine months ended September 30, 2017 were €3.6 million, an increase of €1.6 million, or 74%, as compared with the nine months ended September 30, 2016. The increase reflects not only higher financing costs incurred on our EIB credit facility, but also an increase in expenses for legal advice in connection with shareholder litigation.

 

Other income and expenses

 

Other income for the nine months ended September 30, 2017 was €169 thousand, as compared with other income of €2.3 million for the nine months ended September 30, 2016. This decrease was mainly due to the non-recurring repayment in the nine months ended September 30, 2016 of our FDA submission fee in the amount of €2.1 million.

 

Other expenses in the nine months ended September 30, 2017 were €1 million, an increase of €1 million compared to the nine months ended September 30, 2016. This increase chiefly reflects currency differences due to the U.S. dollar’s appreciation to the euro and a significant increase in our expenses denominated in U.S. dollars, resulting from our increased marketing and sales activities in the U.S.

 

Consolidated net result

 

The total loss for the nine months ended September 30, 2017 was €(13.7 million), significantly greater than loss of €(7.2 million) for the nine months ended September 30, 2016 and predominantly reflecting the aforementioned trends in operating expenses and other income.

 

Financial Position

 

Share capital; capital measures

 

Our fully paid in share capital was €38.4 million as of September 30, 2017 and is divided into 38,416,503 registered shares with a nominal value of €1.00 each. Our registered share capital amounted to €37.7 million as of December 31, 2017 and was increased by €694 thousand during the nine months ended September 30, 2017 through the exercise of conversion rights from the 2016/2021 convertible bond as well as from the 2017/2022 convertible bond.

 

Liquidity

 

Cash flow from operating activities decreased year-on-year from €(6.9 million) in the nine months ended September 30, 2016 to €(12.3 million) for the nine months ended September 30, 2017.

 

Capital expenditure increased by €31 thousand in the nine months ended September 30, 2017, as compared with the nine months ended September 30, 2016. Given this, cash flow from investing activities decreased from €(208) thousand in the nine months ended September 30, 2016 to €(246) thousand in the nine months ended September 30, 2017, as compared with the nine months ended September 30, 2016.

 

Cash flow from financing activities in the nine months ended September 30, 2017 was €10.7 million, compared with €8.9 million in the nine months ended September 30, 2016. In the nine months ended September 30, 2016, we received €9.3 million in proceeds from the issuance of new shares, whereas in the nine months ended September 30, 2017 we received €5.0 million in proceeds from the issuance of our 2017/2022 convertible bond and €10 million from our drawing of the first two tranches under our EIB credit facility. Short-term financial debt reduced by €3.6 million in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, driven primarily by our early repayment of the 2009/2017 warrant bond in August 2017.

 

Cash and cash equivalents were €13.3 million as of September 30, 2017, a decrease of €1.8 million as compared with December 31, 2016.

 

Biofrontera AG

Condensed consolidated balance sheet

 

(in EUR thousands)

 

Assets

 

  September 30,
2017
    December 31,
2016
 
Non-current assets            
Tangible assets     672.3       644.7  
Intangible assets     800.6       1,251.9  
Total Non-current assets      1,472.9       1,896.6  
                 
Current assets                
Current financial assets                
Trade receivables     1,266.2       1,624.0  
Other financial assets     1,009.9       1,376.9  
Cash and cash equivalents     13,307.3       15,126.1  
Total Current financial assets      15,583.4       18,127.0  
                 
Other current assets                
Inventories                
Raw materials and supplies     1,510.9       1,350.3  
Unfinished products     463.5       477.1  
Finished products and goods     1,972.7       1,818.9  
Income tax reimbursement claims     51.7       33.0  
Other assets     117.2       175.8  
Total Other current assets     4,116.0       3,855.1  
Total Current Assets     19,699.4       21,982.1  
Total assets     21,172.3       23,878.7  

 

 12 

 

 

Liabilities            
in €’000   September 30,
2017
    December 31,
2016
 
Equity            
Subscribed capital     38,416.4       37,722.4  
Capital reserve     100,715.4       98,676.8  
Capital reserve from foreign currency conversion  adjustments     730.1       (154.2 )
Loss carry forward     (120,402.9 )     (109,823.7 )
Net loss of the year     (14,614.3 )     (10,579.2 )
Total equity      4,844.7       15,842.1  
                 
Long-term liabilities                
Long-term financial liabilities     12,745.4       3,596.9  
                 
Current liabilities                
Current financial liabilities                
Trade payables     931.4       2,093.2  
Short-term financial debt     131.1       274.4  
Other financial liabilities     100.1       58.4  
Total current liabilities      1,162.6       2,426.0  
                 
Other current liabilities                
Other provisions     2,040.6       1,823.7  
Other current liabilities     379.0       190.0  
Total Other current liabilities     2,419.6       2,013.7  
Total liabilities      3,582.2       4,439.7  
Total equity and liabilities     21,172.3       23,878.7  

 

 13 

 

 

Condensed consolidated statement of comprehensive income

 

in €’000   First nine months of 2017     First nine months of 2016     Third quarter 2017     Third quarter 2016  
Sales revenue     7,334.0       2,881.4       2,327.6       1,172.8  
Cost of sales     (899.7     (1,028.8     (264.4     (265.2
Gross profit from sales     6,434.3       1,852.6       2,063.2       907.6  
                                 
Operating expenses                                
Research and development costs     (3,232.9     (3,358.4     (1,047.5     (1,506.4
General administrative costs     (3,625.9     (2,080.8     (1,930.3     (708.4
thereof financing costs     (1,490.5     (485.0     (979.7     (112.6
Sales costs     (12,586.2     (4,937.4     (4,310.9     (2,105.0
                                 
Loss from operations     (13,010.7     (8,524.0   (5,225.5     (3,412.2
                                 
Interest expenses     (703.9     (904.0     (374.3     (309.5
Interest income     4.9       2.4       0.8       0.5  
Other expenses     (1,074.0     (35.5     (333.1     (21.4
Other income     169.4       2,297.3       54.4       51.1  
Profit/loss before income tax     (14,614.3     (7,163.8     (5,877.7     (3,691.5
Income tax     0.0       0.0       0.0       0.0  
Profit or loss for the period     (14,614.3     (7,163.8     (5,877.7     (3,691.5
                                 
Expenses and income not included in profit/loss                                
Items which may in future be regrouped into the profit and loss statement under certain conditions     884.2       0.7       288.3       0.0  
Translation differences resulting from the conversion of foreign business operations                                
Other income total     884.2       0.7       288.3       0.0  
                                 
Total profit/loss for the period     (13,730.1     (7,163.1     (5,589.4     (3,691.5
                                 
Basic/diluted earnings per share in EUR     (0.38     (0.24     (0.15     (0.12

 

 14 

 

 

Condensed consolidated cash flow statement

 

in €’000   First nine months of 2017     First nine months of 2016     Third quarter 2017     Third quarter 2016  
                         
Cash flows from operations                        
Profit/loss for the period     (14.614.3 )     (7.163.8 )     (5.887.7 )     (3.691.5 )
Adjustments to reconcile profit/loss for the period to cash flow into operations                                
Financial result     699.0       901.7       373.6       308.9  
Depreciation     674.1       606.7       230.3       202.4  
(Gains)/losses from disposal of assets     0.0       4.8       0.0       0.0  
Non-cash expenses and income     3.455.1       88.5       114.2       42.2  
Changes in operating assets and liabilities                                
Trade receivables     357.9       379.5       (64.1 )     (2.7 )
Other assets and income tax assets     406.9       (990.3 )     34.5       (651.7 )
Inventories     (300.9 )     (1.049.8 )     (112.7 )     (907.5 )
Trade payables     (1.161.7 )     (306.0 )     482.9       (260.7 )
Long-term and current financial liabilities     (2.357.7 )     0.0       194.0       0.0  
Provisions     297.2       659,9       231.1       576.8  
Other liabilities     230.7       (16.2 )     167.1       9.5  
Net cash flow into operational activities     (12.313.7 )     (6.885.0 )     (4.226.8     (4.374.3 )
                                 
Cash flows from investment activities                                
Purchase of intangible and tangible assets     (260.2 )     (229.5 )     (56.5 )     (74.9 )
Interest received     4.7       2.3       3.0       0.6  
Revenue from sale of intangible and tangible assets     9.7       19.2       0.0       9.5  
Net cash flow into investment activities     (245.8 )     (208.0 )     (53.5 )     (64.8 )
                                 
Cash flows from financing activities                                
Proceeds from the issue of shares     0.0       9.303.2       0.0       0.0  
Proceeds from conversions of option bond 2011/2016     4.999.0       0.0       0.0       0.0  
Interest paid     (622.2 )     (436.1 )     (227.8 )     (0.3 )
Increase/(decrease) in long-term financial debt     10.000.0       (8.280.7 )     10.000.0       (110.6 )
Increase/(decrease) in short-term  financial debt     (3.636.1 )     8.280.7       (3.636.1 )     110.6  
Net cash flows from financing activities     10.740.7       8.867.1       6.136.1       (0.3 )
                                 
Net increase (decrease) in cash and cash equivalents     (1.818.8 )     1.774.1       1.855.8       (4.439.4 )
Cash and cash equivalents at the beginning of the period     15.126.1       3.959.2       11.451.5       10.172.7  
Cash and cash equivalents at end of the period     13.307.3       5.733.3       13.307.3       5.733.3  
                                 
Composition of financial resources at the end of the period                                
Cash and cash equivalents     13.307.3       5.733.3       13.307.3       5.733.3  

 

 15 

 

 

The Offering

 

The shares being offered by this prospectus are part of a combined offering relating to up to 6,000,000 newly issued shares of our company. The combined offering consists of (i) a rights offering to existing holders of our shares under German law and (ii) this initial public offering of ADSs in the United States. We are offering up to [____________] newly issued shares in the rights offering. We have excluded shareholders’ subscription rights for a residual amount of [____] newly issued shares in accordance with German law and our articles of association. Those new shares as to which subscription rights have been excluded or not exercised during the subscription period will be offered in the U.S. offering. The initial per share offering price to the public, which will be the same for the ADSs sold in this offering and the shares sold in the German preemptive rights offering (adjusting for the euro/U.S. dollar exchange rate and the ratio of shares to ADSs), will be determined upon completion of the bookbuilding period, which is expected to occur on [___]. The number of ADSs offered in this offering will be determined upon completion of the subscription period for the German preemptive rights offering, on or about [___]. 
     
American Depositary Shares offered by Biofrontera AG   We are offering [_____________] ADSs (or [_____________] ADSs if the underwriters exercise their over-allotment option to purchase additional ADSs in full) in the United States, which we refer to as “this offering” or the “U.S. offering”. As described below, we are making a separate preemptive rights offering under German law (the “German preemptive rights offering”) for an aggregate amount of [_____________] common shares (or the equivalent of approximately [_____________] ADSs). We have excluded shareholders’ subscription rights for a residual amount of [______] newly issued shares in accordance with German law and our articles of association. In addition, those new shares as to which subscription rights have been excluded or not exercised during the subscription period will be offered in this offering of ADSs.
     
German preemptive rights offering  

On May 24, 2017, our shareholders authorized our management board with the approval of our supervisory board to increase the Company's capital by 6,000,000 shares, equivalent to 3,000,000 ADSs. In order to carry out the capital increase, we are required by German law and the terms of our authorized capital to make a preemptive rights offering to our existing shareholders. In the German preemptive rights offering we will be offering holders of our shares the right to subscribe for newly issued shares in proportion to their holdings of ordinary shares.

 

The German preemptive rights offering is expected to commence on [____] and will expire on [______]. We will determine the subscription price (which will be the same as the per share offer price for the ADSs sold in the U.S. offering (adjusting for the euro/U.S. dollar exchange rate and the ratio of shares to ADSs)) at the latest by [____] p.m. Frankfurt time on [______].

     
American Depositary Shares to be outstanding immediately after this offering   [_____________] ADSs (or [_____________] ADSs if the underwriters exercise their over-allotment option to purchase additional ADSs in full).
     
Ordinary shares to be outstanding immediately after this offering   [___] shares (or [___] shares if the underwriters exercise their over-allotment option to purchase additional ADSs in full).

 

 16 

 

 

    Note: all descriptions of shares outstanding immediately after closing of this offering assume completion of the temporary share loan arrangement under German law in connection with closing and issuance of new shares related to this offering. See “— Share Loan” “Related Party Transactions — Share Loan Agreement.”
     
Over-allotment option   As part of the offering, we have granted the underwriters a 45-day option to purchase up to an additional [_____] ADSs to cover over-allotments, if any.
     
Use of Proceeds   We intend to use the net proceeds from this offering to increase our marketing and sales organization in the U.S. We also intend to use the net proceeds of the offering to continue to fund clinical trials of Ameluz® and to make regulatory filings for marketing approval of Ameluz®, both for geographical expansion and the extension of the indications for Ameluz®. We will use the remainder of the net proceeds for general corporate purposes. See “Use of Proceeds”.
     
Offering price  

We will determine the offer price for the shares sold in this offering (which will be equal to the subscription price per share at which our shares will be offered in the German preemptive rights offering (adjusting for the euro/U.S. dollar exchange rate and the ratio of shares to ADSs)) upon completion of the bookbuilding period, which is expected to occur on [___]. In determining the offer price, we will consider, among other things, current market conditions, the trading price and volume of trading in our ordinary shares on the XETRA electronic trading platform of the Frankfurt Stock Exchange and the results of the bookbuilding process for the shares to be offered in this offering. See “Underwriting—Pricing of the Offering” for a discussion of factors considered in determining the price to the public of the ADSs. 

 

On [_________], the closing market price for our ordinary shares on the XETRA electronic trading platform of the Frankfurt Stock Exchange was €[____] per share, equivalent to approximately $[____] per ADS based on an assumed exchange rate of €[___] to $1.00 and a ratio of [____] ordinary shares for each ADS.

     
The ADSs   Each ADS represents [two] ordinary shares.
     
    The depositary will hold the ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement. You may cancel your ADSs and withdraw the underlying ordinary shares. The depositary will charge you fees for, among other acts, any cancellation. Except in certain limited instances described in the deposit agreement, we may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the terms of the deposit agreement then in effect.
     
    To better understand the terms of the ADSs, you should carefully read “Description of American Depositary Shares” (which contains a summary of the material terms of the deposit agreement) in this prospectus. You should also read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.

 

 17 

 

  

Voting Rights   Holders of ADSs must follow specific procedures to exercise the voting rights of the ordinary shares underlying the ADSs and will not be able to exercise those rights unless we request the Bank of New York Mellon Corporation, as ADS depositary, to solicit voting instructions from ADS holders. We discuss these voting rights and procedures further in the sections of this prospectus entitled “Description of Share Capital — Shareholders’ Meeting and Voting Rights” and “Description of American Depositary Receipts — Voting Rights”.
     
Dividend Policy   We have not paid any dividends on our shares in the past and do not intend to pay dividends on our shares or ADSs for the foreseeable future.
     
Lock-Up Agreements   We will agree with the underwriters that, on or before [________], we will, subject to certain exceptions, (a) not directly or indirectly, offer, sell or otherwise dispose of any shares of our capital stock or any other securities which are convertible into or exchangeable for shares of our capital stock, (b) not exercise any authorization pursuant to our articles of association to increase our capital other than for the purpose of issuing ordinary shares to the beneficiaries of our existing stock option plans and convertible bonds, warrant bonds or warrants upon the exercise of options or conversion rights, and (c) not propose a capital increase to our shareholders other than a proposal for authorized capital or for contingent capital, in each case except with the prior written consent of The Benchmark Company, LLC. Certain exceptions apply for share issuances directly to strategic partners in connection with partnering or licensing transactions or in connection with an acquisition or joint venture. See “Underwriting”.
     
    Our chief executive officer will agree with the underwriters that, except with the prior written consent of The Benchmark Company, LLC, on or before [________] he will not, directly or indirectly, sell or otherwise dispose of any of our shares or any other securities which are convertible into or exchangeable for our shares or enter into similar transactions to this effect.  See “Underwriting”.
     
Conflict of Interest   The Benchmark Company, LLC is acting as representative for the underwriters in connection with this offering. An affiliate and a principal of The Benchmark Company, LLC holds a position as a member of the supervisory board of our company. Therefore, The Benchmark Company, LLC is deemed to have a “conflict of interest” under Rule 5121(f)(5) of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Accordingly, this offering will be conducted in accordance with the applicable provisions of Rule 5121, which requires, among other things, that a “qualified independent underwriter” participate in the preparation of, and exercise the usual standards of “due diligence” with respect to, the registration statement and this prospectus. Dawson James Securities, Inc. (“Dawson”) has agreed to act as a “qualified independent underwriter” within the meaning of Rule 5121 in connection with this offering. We have agreed to indemnify Dawson against liabilities incurred in connection with acting as qualified independent underwriter, including liabilities under the Securities Act. Dawson will undertake the legal responsibilities and liabilities of an underwriter under the Securities Act, specifically including those inherent in Section 11 thereof. Dawson will not receive any additional fees for serving as a “qualified independent underwriter” in connection with this offering.
     
Depositary   Bank of New York Mellon Corporation
     
Custodian   Bank of New York Mellon SA/NV

 

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Share Loan  

To facilitate the orderly closing of this offering of ADSs, and because of timing considerations related to the technical issuance and registration of new ordinary shares under German law, the shares underlying the ADSs immediately prior to and concurrent with the consummation of this offering and the time of delivery of the ADSs will be shares (referred to as the “Borrowed Shares”) loaned by Maruho Deutschland GmbH to Lang & Schwarz Broker GmbH, acting as a service provider for us, for deposit with the custodian for the Depositary under the ADS facility (the “Share Loan”). In connection with the consummation of this offering and as promptly as practicable after the delivery of the ADSs, newly issued ordinary shares of our company of equal number will be delivered to Maruho Deutschland GmbH in repayment and satisfaction in full of the Share Loan. The Borrowed Shares will be retained by the custodian for the Depositary. See "Related Party Transactions — Share Loan Agreement".

 

Listing and Quotation   Our ordinary shares are listed on the Frankfurt Stock Exchange under the Symbol B8F; International Securities Identification Number (ISIN) DE0006046113; German securities code (WKN) 604611. Application has been made for quotation of the ADSs on the NASDAQ Capital Market under the symbol “BFRA.”

 

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RISK FACTORS

 

You should carefully consider the risks described below and all other information contained in this prospectus before making an investment decision. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of the ADSs could decline, and you may lose part or all of your investment. This prospectus also contains forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including the risks described below and elsewhere in this prospectus.

 

Risks Related to Our Financial Position and Capital Requirements

 

We have a history of operating losses and anticipate that we will continue to incur operating losses in the future and that we may never sustain profitability.

 

We have incurred losses in each year since inception. Our net loss for the fiscal years ended December 31, 2015 and December 31, 2016 was €11.2 million and €10.6 million, respectively. Our net loss for the nine months ended September 30, 2017 and September 30, 2016 was €14.6 million and €7.2 million, respectively. As of September 30, 2017, we had an accumulated deficit of €135.0 million.

 

Our ability to become profitable depends on our ability to further commercialize our principal product Ameluz®. Even if we are successful in increasing our product sales, we may never achieve or sustain profitability. We anticipate substantially increasing our sales and marketing expense as we attempt to exploit the recent regulatory approvals we have received to market Ameluz® in the U.S. for the photodynamic therapy treatment of actinic keratoses of mild-to-moderate severity on the face and scalp and in the EU for the treatment of field cancerization and basal cell carcinoma. There can be no assurance that our sales and marketing efforts will generate sufficient sales to allow us to become profitable. Moreover, of the numerous risks and uncertainties associated with developing and commercializing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if ever.

 

If we fail to obtain additional financing, we may be unable to complete the development and commercialization of our products and product candidates.

 

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to pursue additional indications for which our products and product candidates may be commercialized, and to continue the clinical development of our product candidates, including further Phase III clinical trials. We also require significant additional funds in order to commercialize Ameluz® in the U.S.

 

We believe that our existing cash and cash equivalents, the credit facilities available to us under the EIB credit facility, the anticipated net proceeds from this offering, and revenue from product sales and future milestone or license payments will be sufficient to enable us to fund our operating expenses and to advance our commercialization strategy in the U.S. for the next 12 months. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. After the next 12-month period, we may require additional capital for the further development and commercialization of our products. We may need substantial additional funds to fully develop, manufacture, market and sell our other potential products. Our future funding requirements, both near- and long-term, will depend on many factors, including, but not limited to:

 

·the timing, costs and results of clinical trials for our product Ameluz®;

 

·the outcome, timing and cost of regulatory approvals by the FDA, the European Medicines Agency, or EMA, and comparable foreign regulatory authorities, including the potential for the FDA, EMA or comparable foreign regulatory authorities to require that we perform more studies than those that we currently expect;

 

·the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

·the effects of competing technological and market developments;

  

·the cost and timing of completion of commercial-scale manufacturing activities; and

 

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·the cost of establishing sales, marketing and distribution capabilities for Ameluz® PDT in the U.S. and in such other regions in which we are approved to market it and in which we choose to commercialize it.

 

We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts and on terms acceptable to us, we may have to significantly delay, scale back or discontinue the commercialization of our products or development of product candidates. We also could be required to license our rights to our products and product candidates to third parties on unfavorable terms. In addition, any equity financing would likely result in dilution to our existing holders of our shares and ADSs, and any debt financing would likely involve significant cash payment obligations and include restrictive covenants that may restrict our ability to operate our business.

 

Any of the above events could significantly harm our business, prospects, financial condition and/or results of operations and could cause the price of our shares or ADSs to decline.

 

Our existing and any future indebtedness could adversely affect our ability to operate our business.

 

In May 2017, we entered into a finance contract with the European Investment Bank, or EIB, under which EIB agreed to provide us with loans of up to €20 million in the aggregate. Our finance contract with EIB, which we refer to as the EIB credit facility, is unsecured, is guaranteed by certain of our subsidiaries, and is available to be drawn in tranches during a two year period. Future tranches require the achievement of certain milestones. Each tranche must be repaid five years after drawdown. The EIB credit facility contains undertakings by our company regarding the use of proceeds and limitations on debt, liens, mergers, acquisitions, asset sales, dividends and other restrictive covenants. As of the date of this prospectus, we have borrowed €10 million under the EIB credit facility. On July 6, 2022, we will be required to repay this €10 million principal amount, plus €3 million in deferred interest and an additional amount of performance participation interest determined by reference to the change in our market capitalization between disbursement and maturity of the loan. Under the EIB credit facility, we are not permitted to incur additional third-party debt in excess of €1 million without the prior consent of the EIB (subject to certain exceptions, such as for ordinary course deferred purchase arrangements and, subject to maximum amounts, various types of leases).

 

In addition, in November 2016 we issued convertible bonds in the aggregate initial principal amount of €5.0 million maturing on January 1, 2021 of which €4.9 million has already been converted into shares. In January 2017, we issued convertible bonds maturing on January 1, 2022 in the aggregate initial principal amount of €5.0 million of which €2.3 million has already been converted into shares. The convertible bonds provide the holders of those bonds with the right to convert them into our ordinary shares at set conversion prices, depending upon time of conversion. The convertible bonds we issued in December 2016 provide the holders with the right to convert them, at any time, in whole but not in part, into our ordinary shares, at a conversion price per share equal to: €4.00 per share from January 1, 2017 until December 31, 2018 and €5.00 per share from January 1, 2018 until maturity. The convertible bonds we issued in January 2017 provide the holders of those bonds with the right to convert them, at any time, in whole but not in part, into our ordinary shares, at a conversion price per share equal to: €4.00 per share from April 1, 2017 until December 31, 2018 and €5.00 per share from January 1, 2018 until maturity. If all of the remaining bonds were converted, we would be required to issue up to 686,525 additional ordinary shares, which would result in additional dilution to shareholders.

 

Our indebtedness could have significant adverse consequences, including:

 

·requiring us to dedicate a portion of our cash to the payment of interest and principal, reducing money available for working capital, capital expenditure, product development and other general corporate purposes;

 

·increasing our vulnerability to adverse changes in general economic, industry and market conditions;

 

·increasing the risk of dilution to the holders of our shares or ADSs in the event any of these bonds are exercised for or converted into our ordinary shares;

 

·limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

 

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·placing us at a competitive disadvantage to competitors that are better capitalized than we are.

 

We may not have sufficient funds and may be unable to arrange for additional financing to pay the amounts due under our existing debt obligations, in particular the minimum €13 million payment that we must make on July 6, 2022. Failure to make payments or comply with other covenants under our existing debt could result in an event of default and acceleration of amounts due. If an event of default occurs and the lender or lenders accelerate the amounts due, we may not be able to make accelerated payments, and such lenders could file suit against us to collect the amounts due under such obligations or pursue other remedies. In addition, the covenants under our existing debt obligations could limit our ability to obtain additional debt financing.

 

Risks Related to Our Business and Strategy

 

Certain of our important patents will expire in 2019. Although the process of developing generic topical dermatological products presents specific challenges that may deter potential generic competitors, generic versions of Ameluz® could enter the market after expiration of these patents. If this happens, we may need to reduce the price of Ameluz® significantly and may lose significant market share.

 

The patent family that protects aminolevulinic acid hydrochloride, an active ingredient in Ameluz®, against copying by competitors will expire on November 12, 2019. This patent family includes U.S. Patent No. 6,559,183, which is listed in the FDA Orange Book and identified as covering aminolevulinic acid hydrochloride, the active ingredient in Ameluz®. Patent No. 6,559,183 serves as a significant barrier to entry into the market by generic versions of Ameluz®.  Although the process of developing generic topical dermatological products presents specific challenges that may deter potential generic competitors, once this patent expires, generic versions of Ameluz® may not be prevented from entering the market and competing with Ameluz®. This may cause a significant price drop and, therefore, a significant drop in our profits. We may also lose significant market share for Ameluz.

 

Insurance coverage and medical expense reimbursement may be limited or unavailable in certain market segments for our products or product candidates, which could make it difficult for us to sell our products.

 

Government authorities and third party payors, such as private health insurers and health maintenance organizations or, in some jurisdictions such as Germany, statutory health insurance, decide which products they will cover and the amount of reimbursement. Reimbursement by a third party payor may depend upon a number of factors, including the government or third party payor’s determination that use of a product is:

 

·a covered benefit under its health plan;

 

·safe, effective and medically necessary;

 

·reasonable and appropriate for the specific patient;

 

·cost-effective; and

 

·neither experimental nor investigational.

 

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Obtaining coverage and reimbursement approval for a product from a government or other third party payor is a time-consuming and costly process that could require us to provide to the payor supporting scientific, clinical and cost-effectiveness data for the use of our products. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement or a particular reimbursement amount. If reimbursement of our future products or extended indications for existing products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

 

The pricing of prescription pharmaceuticals is subject to governmental control in some of the countries in which we have received and/or seek to receive approval to commercialize certain of our products. We are approved to market certain of our products in the EU and the U.S., and we intend to seek approval to market our product candidates in selected other jurisdictions. If we obtain approval in one or more foreign jurisdictions for our product candidates, we will be subject to rules and regulations in those jurisdictions. In some countries, particularly those in the EU, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after obtaining marketing approval for a product candidate. In addition, market acceptance and sales of our product candidates will depend significantly on the availability of adequate coverage and reimbursement from government or other third party payors for our product candidates and may be affected by existing and future health care reform measures. Without adequate levels of reimbursement by government health care programs and private health insurers, the market for our products will be limited. While we continue to support efforts to improve reimbursement levels to physicians and plan to work to improve coverage for our products, if our efforts are not successful, a broader adoption of our products and sales of our products could be negatively impacted.

 

Healthcare legislative changes may have a material adverse effect on our business and results of operations.

 

In the U.S. and certain other countries, there have been a number of legislative and regulatory changes to the health care system that could impact our ability to sell our products profitably. In particular, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 revised the payment methodology for many products under Medicare in the U.S., which has resulted in lower rates of reimbursement. In 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the Affordable Care Act, was enacted. On January 20, 2017, President Donald Trump signed an executive order stating that the administration intended to seek prompt repeal of the Affordable Care Act, and, pending repeal, directed by the U.S. Department of Health and Human Services and other executive departments and agencies to take all steps necessary to limit any fiscal or regulatory burdens of the Affordable Care Act. There is no guarantee whether the Affordable Care Act will remain in effect or be repealed/replaced. There is significant uncertainty about the future of the Affordable Care Act in particular and healthcare laws generally in the United States. This expansion of the government’s role in the U.S. healthcare industry may further lower rates of reimbursement for pharmaceutical products. We are unable to predict the likelihood of changes to the Affordable Care Act or other healthcare laws which may negatively impact our profitability.

 

The Affordable Care Act is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and the health insurance industry, impose new taxes and fees on the healthcare industry and impose additional health policy reforms. This law revises the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states once the provision is effective. Further, the law imposes a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may require us to modify our business practices with healthcare practitioners. While the U.S. Supreme Court upheld the constitutionality of most elements of the Affordable Care Act in 2012, other legal challenges are still pending final adjudication in several jurisdictions. In addition, Congress has also proposed a number of legislative initiatives, including possible repeal of the Affordable Care Act. At this time, there remains a significant amount of uncertainty related to the future of the Affordable Care Act, and whether there will be changes to certain provisions or its entirety. We can provide no assurance that the Affordable Care Act, as currently enacted or as amended in the future, will not adversely affect our business and financial results, and we cannot predict how future federal or state legislative or administrative changes relating to healthcare reform will affect our business.

 

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Other legislative changes have been proposed and adopted in the U.S. since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2012 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2 percent per fiscal year. The American Taxpayer Relief Act of 2012, or the ATRA, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Recently there has been increased government scrutiny regarding the manner in which manufacturers set prices for and market commercial products. If we become the subject of any government investigation with respect to our drug pricing, marketing, or other business practices, we could incur significant expense and could be distracted from operation of our business and execution of our strategy. Any such investigation could also result in reduced market acceptance and demand for our products, could harm our reputation and our ability to market our products in the future, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

There have been, and likely will continue to be, legislative and regulatory proposals at the U.S. federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. Additionally, third party payors, including governmental payors, managed care organizations and private health insurers, are increasingly challenging the prices charged for medical products and services and examining their cost effectiveness. The continuing efforts of governments, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare and/or impose price controls may adversely affect:

 

·the demand for our product candidates, if we obtain regulatory approvals;

 

·our ability to set a price or obtain reimbursement that we believe is fair for our products;

 

·our ability to generate revenues and achieve or maintain profitability; and

 

·the level of taxes that we are required to pay.

 

Any denial or reduction in reimbursement from Medicare or other programs or governments may result in a similar denial or reduction in payments from private payors, which may adversely affect our future profitability.

 

To date, we have engaged in only limited sales of our products, primarily in Germany and Spain and, more recently, in the U.S.

 

We have engaged in only limited sales of our products to date. In Germany, the majority of our sales have been generated in the private dermatology offices sector. Historically, our sales partners in European countries outside of Germany have experienced difficulty in selling Ameluz® because that process involves selling both drug combined with a procedure, an area in which our sales partners generally have little experience. We launched the commercialization of Ameluz® and BF-RhodoLED® for actinic keratosis in the U.S. in October 2016 and have a limited history of marketing our products there. Our products may never gain significant acceptance in the European or U.S. marketplace and, therefore, may never generate substantial revenue or profits for us. We must establish a larger market for our products and build that market through marketing campaigns to increase awareness of, and confidence by doctors in, our products. If we are unable to expand our current customer base and obtain market acceptance of our products, our operations could be disrupted and our business may be materially adversely affected. Even if we achieve profitability, we may not be able to sustain or increase profitability.

 

Competing products and technologies based on traditional treatment methods may make our products or potential products noncompetitive or obsolete.

 

Well-known pharmaceutical, biotechnology and medical device companies are marketing well-established therapies for the treatment of actinic keratosis and basal cell carcinoma. Doctors may prefer to use familiar therapies, rather than trying our products.

 

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Our industry is subject to rapid, unpredictable and significant technological change and intense competition. Our competitors may succeed in developing, acquiring, or licensing on an exclusive basis products that are safer, more effective or more desirable than ours. Many of our competitors have substantially greater financial, technical and marketing resources than we have. In addition, several of these companies have significantly greater experience than we do in developing products, conducting preclinical and clinical testing, obtaining regulatory approvals to market products for health care, and marketing healthcare products.

 

Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries.

 

We cannot guarantee that new drugs or future developments in drug technologies will not have a material adverse effect on our business. Increased competition could result in price reductions, lower levels of government or other third party reimbursements, failure to achieve market acceptance and loss of market share, any of which could adversely affect our business, results of operations and financial condition. Further, we cannot give any assurance that developments by our competitors or future competitors will not render our technologies obsolete or less advantageous.

 

We face significant competition from other pharmaceutical and medical device companies and our operating results will suffer if we fail to compete effectively. We also must compete with existing treatments, such as simple curettage and cryotherapy, which do not involve the use of a drug but have gained significant market acceptance. We have recently lost market share in Germany to daylight PDT products, an indication for which we have applied but for which Ameluz® is not currently approved.

 

The pharmaceutical and medical device industry is characterized by intense competition and rapid innovation. Our competitors may be able to develop other products that are able to achieve similar or better results for the treatment of actinic keratosis. We expect that our future competitors will include mostly established pharmaceutical companies, such as Sun Pharma and Galderma. Most of our competitors have substantially greater financial, technical and other resources, such as larger research and development staffs and experienced marketing and manufacturing organizations and well-established sales forces. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries.

 

Our competitors may succeed in developing, acquiring or licensing products that are more effective or less costly than our products and product candidates. Metvix® has also recently been approved in the EU for use in daylight photodynamic therapy for which it is sold by Galderma under the brand name Luxerm® in Germany and Luxera® in other European countries. This gives that drug a competitive advantage compared to Ameluz®, as Ameluz® is not yet approved to be used in daylight photodynamic therapy to treat actinic keratosis. In recent months, the market share of Ameluz® of photodynamic therapy drugs for treatment of actinic keratosis dispensed by German public pharmacies has fallen from over 75% to approximately 60%, a decline which we believe resulted primarily from the introduction to the German market of Luxerm® in 2016. We believe that daylight photodynamic therapy products will play an increasingly important role in Europe in the future and will begin to be prescribed as an alternative to less effective, self-applied, topical prescription product creams (which have historically been market leaders in the EU in treating actinic keratosis). We have applied to extend our indication for Ameluz® to daylight photodynamic therapy in the EU to better compete with Metvix® and Luxerm®, but there can be no assurance that we will receive the extended indication. If we fail to obtain this extended indication, then we may continue to lose market share to Metvix® and Luxerm® and any other products that receive approval for daylight photodynamic therapy in the EU in the future.

 

In addition, our products compete with other therapies, such as simple curettage and, particularly in the U.S., cryotherapy, which do not involve the use of a drug but have gained significant market acceptance.

 

If we are not able to compete effectively with the competitors and competing therapies discussed above, we may lose significant market share in the relevant markets, which could have a material adverse effect on our revenue, results of operations and financial condition.

 

If we are unable to establish effective marketing and sales capabilities or enter into agreements with third parties to market and sell our products, we may be unable to generate revenues.

 

In order to commercialize our products, we must further build our marketing, sales and distribution capabilities, in particular in the U.S. The establishment, development and training of our sales force and related compliance plans to market our products are expensive and time consuming and can potentially delay the commercial success of our products. In the event we are not successful in developing our marketing and sales infrastructure, we may not be able to successfully commercialize our products, which would limit our ability to generate product revenues.

 

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We depend on a single unaffiliated contract manufacturer to manufacture Ameluz® and two unaffiliated contractors to produce 5-aminolevulinic acid, the active pharmaceutical ingredient in Ameluz®, for us. If we fail to maintain our relationship with these suppliers or if these suppliers are unable to continue to produce product for us, our business could be materially harmed.

 

We depend on a single unaffiliated contract manufacturer located in Switzerland to manufacture Ameluz® and two unaffiliated contractors to produce 5-aminolevulinic acid, the active pharmaceutical ingredient in Ameluz®, for us. The initial terms of our contracts with these suppliers begin to expire in June 2020, and the contracts renew automatically for one- or two-year periods, as applicable, until they are terminated. For more information on the terms of our contracts with these suppliers, see “Business—Commercial Partners and Agreements”. If we fail to maintain our relationship with these parties, we may be unable to obtain an alternative manufacturer of Ameluz® or suppliers of 5-aminolevulinic acid that could deliver the quantity of the product at the quality and cost levels that we require. Even if acceptable alternative suppliers could be found, we may experience delays in transitioning the manufacturing from our existing suppliers to our new suppliers (in particular with respect to our manufacturer of Ameluz®). Problems of this kind could cause us to experience order cancellations and loss of market share. The failure of the suppliers to supply Ameluz® or 5-aminolevulinic acid that satisfies our quality, quantity and cost requirements in a timely manner could impair our ability to deliver Ameluz® and could increase our costs, particularly if we are unable to obtain Ameluz® or 5-aminolevulinic acid from alternative sources on a timely basis or on commercially reasonable terms. In addition, our suppliers are regulated by the FDA and must comply with applicable laws and regulations, including home-country laws. If the suppliers fail to comply, this could harm our business.

 

If we fail to manufacture Ameluz® or BF-RhodoLED® or other marketed products and product candidates in sufficient quantities and at acceptable quality and cost levels, or to fully comply with current good manufacturing practice, or cGMP, or other applicable manufacturing regulations, we may face a bar to, or delays in, the commercialization of our products, breach obligations to our licensing partners or be unable to meet market demand, and lose potential revenues.

 

The manufacture of our products requires significant expertise and capital investment. Currently, all commercial supply for Ameluz® is manufactured by a single unaffiliated contract manufacturer. We would need to spend substantial time and expense to replace that manufacturer if it failed to deliver products in the quality and quantities we demand or failed to meet any regulatory or cGMP requirements. We take precautions to help safeguard the manufacturing facilities, including acquiring insurance, and performing on site audits. However, vandalism, terrorism or a natural or other disaster, such as a fire or flood, could damage or destroy manufacturing equipment or our inventory of raw material or finished goods, cause substantial delays in our operations, result in the loss of key information, and cause us to incur additional expenses. Our insurance may not cover our losses in any particular case. In addition, regardless of the level of insurance coverage, damage to our facilities may have a material adverse effect on our business, financial condition and operating results.

 

We must comply with federal, state and foreign regulations, including FDA regulations governing cGMP enforced by the FDA through its facilities inspection program and by similar regulatory authorities in other jurisdictions where we do business. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. For our medical device products, we are required to comply with the FDA’s Quality System Regulation, or QSR, which covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our medical device products.

 

Our contract facilities have been inspected by the FDA for cGMP compliance. If we do not successfully maintain cGMP compliance for these facilities, commercialization of our products could be prohibited or significantly delayed. Even after cGMP compliance has been achieved, the FDA or similar foreign regulatory authorities at any time may implement new standards, or change their interpretation and enforcement of existing standards for manufacture, packaging, testing of or other activities related to our products. For our commercialized medical device product, the FDA audits compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. The FDA may conduct inspections or audits at any time. Similar audit rights exist in Europe and other foreign jurisdictions. Any failure to comply with applicable cGMP, QSR and other regulations may result in fines and civil penalties, suspension of production, product seizure or recall, imposition of a consent decree, or withdrawal of product approval, and would limit the availability of our product. Any manufacturing defect or error discovered after products have been produced and distributed also could result in significant consequences, including adverse health consequences, injury or death to patients, costly recall procedures, re-stocking costs, warning letters, Form 483 reports, civil monetary penalties, product liability, damage to our reputation and potential for product liability claims. If we are required to find a new manufacturer or supplier, the process would likely require prior FDA and/or equivalent foreign regulatory authority approval, and would be very time consuming. An inability to continue manufacturing adequate supplies of our products at any contract facilities could result in a disruption in the supply of our products. Delay or disruption in our ability to meet demand may result in the loss of potential revenue. We have licensed the commercial rights in specified foreign territories to market and sell our products. Under those licenses, we have obligations to manufacture commercial product for our commercial partners. If we are unable to fill the orders placed with us by our commercial partners in a timely manner, we may potentially lose revenue and be in breach of our licensing obligations under agreements with them.

 

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Because of a lack of comprehensive public data regarding the market for actinic keratosis treatments in the U.S., the U.S. market size for Ameluz® for the treatment of actinic keratosis may be smaller than we have estimated.

 

Because of a lack of comprehensive public data regarding the market for actinic keratosis treatments in the U.S., some of our estimates and judgments are based on various sources which we have not independently verified and which potentially include outdated information, or information that may not be precise or correct, potentially rendering the U.S. market size for treatment of actinic keratosis with Ameluz® smaller than we have estimated, which may reduce our potential and ability to increase sales of Ameluz® and revenue in the U.S. Although we have not independently verified the data obtained from these sources, we believe that such data provide the best available information relating to the present market for actinic keratosis treatments in the U.S., and we often use such data for our business and planning purposes. We are responsible for the inclusion of such data in this prospectus.

 

If we face allegations of noncompliance with the law and encounter sanctions, our reputation, revenues and liquidity may suffer, and our products could be subject to restrictions or withdrawal from the market.

 

Any government investigation of alleged violations of the law could require us to expend significant time and resources in response and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenues from our products. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected. Additionally, if we are unable to generate revenues from our product sales, our potential for achieving profitability will be diminished and the capital necessary to fund our operations will be increased.

 

Even if we obtain regulatory approvals for our products and product candidates, they may not gain market acceptance among hospitals, physicians, health care payors, patients and others in the medical community.

 

In May 2016, we received approval from the FDA to market in the U.S. Ameluz® in combination with photodynamic therapy using our BF-RhodoLED® lamp for lesion-directed and field-directed treatment of actinic keratoses of mild-to-moderate severity on the face and scalp. We launched the commercialization of Ameluz® and BF-RhodoLED® for actinic keratosis in the U.S. in October 2016. Even after obtaining regulatory approval for our products or extending their indications, our products may not gain market acceptance among hospitals, physicians, health care payors, patients and others in the medical community. Market acceptance of any of our products and product candidates for which we receive approval depends on a number of factors, including:

 

·the clinical indications for which they are approved, including any restrictions placed upon the product in connection with its approval, such as patient registry or labeling restriction;

 

·the product labeling, including warnings, precautions, side effects, and contraindications that the FDA or other regulatory authorities approve;

 

·the potential and perceived advantages of our product candidates over alternative products or therapies;

 

·relative convenience and ease of administration;

 

·the effectiveness and compliance of our sales and marketing efforts;

 

·acceptance by major operators of hospitals, physicians and patients of the product candidate as a safe and effective treatment;

 

·the prevalence and severity of any side effects;

 

·product labeling or product insert requirements of the FDA or other regulatory authorities;

 

·any Risk Evaluation and Mitigation Strategy that the FDA might require for our drug product candidates;

 

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·the timing of market introduction of our product candidates as well as competitive products;

 

·the perceived advantages of our products over alternative treatments;

 

·the cost of treatment in relation to alternative products; and

 

·the availability of adequate reimbursement and pricing by third party payors and government authorities, including any conditions for reimbursement required by such third party payors and government authorities.

 

If our products and product candidates are approved, but fail to achieve market acceptance among physicians, patients, payors, or others in the medical community, we will not be able to generate significant revenues, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

 

With respect to our already approved products, we may be subject to healthcare laws, regulation and enforcement. Our failure to comply with those laws could have a material adverse effect on our results of operations and financial condition.

 

We may be subject to additional healthcare regulation and enforcement by the U.S. federal government and by authorities in the U.S., the EU and other jurisdictions in which we conduct our business. In certain jurisdictions outside of the U.S. where we currently commercialize certain of our products, we are already subject to such regulation and enforcement. Such U.S. laws include, without limitation, state and federal anti-kickback, federal false claims, privacy, security, financial disclosure laws, anti-trust, Physician Payment Sunshine Act reporting and fair trade regulation and advertising laws and regulations. Many states and other jurisdictions have similar laws and regulations, some of which are broader in scope. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, but not limited to, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal, state or other healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results.

 

A recall of our drug or medical device products, or the discovery of serious safety issues with our drug or medical device products, could have a significant negative impact on us.

 

The FDA, the EMA and other relevant regulatory agencies have the authority to require or request the recall of commercialized products in the event of material deficiencies or defects in design or manufacture or in the event that a product poses an unacceptable risk to health. Manufacturers may, under their own initiative, recall a product. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of an unacceptable risk to health, component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of our products would divert managerial and financial resources and have an adverse effect on our reputation, financial condition and operating results, which could impair our ability to produce our products in a cost-effective and timely manner.

 

Further, under the FDA’s medical device reporting, or MDR, regulations, we are required to report to the FDA any event which reasonably suggests that our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction of the same or similar device marketed by us were to recur, would likely cause or contribute to death or serious injury. The FDA also requires reporting of serious, life-threatening, unexpected and other adverse drug experiences and the submission of periodic safety reports and other information. Product malfunctions or other adverse event reports may result in a voluntary or involuntary product recall and other adverse actions, which could divert managerial and financial resources, impair our ability to manufacture our products in a cost-effective and timely manner and have an adverse effect on our reputation, financial condition and operating results. Similar reporting requirements exist in Europe and other jurisdictions.

 

Any adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer notifications, or regulatory agency action, which could include inspection, mandatory recall or other enforcement action. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results as well as threaten our marketing authority for such products.

 

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Our medical device product, the BF-RhodoLED® lamp, is subject to extensive governmental regulation, and failure to comply with applicable requirements could cause our business to suffer.

 

The medical device industry is regulated extensively by governmental authorities, principally the FDA and corresponding state and European and other foreign governmental agencies. The regulations are very complex and are subject to rapid change and varying interpretations. Regulatory restrictions or changes could limit our ability to carry on or expand our operations or result in higher than anticipated costs or lower than anticipated sales. The FDA and other U.S. or European or other foreign governmental agencies regulate numerous elements of our business, including:

 

·product design and development;

 

·pre-clinical and clinical testing and trials;

 

·product safety;

 

·establishment registration and product listing;

 

·distribution;

 

·labeling, manufacturing and storage;

 

·pre-market clearance or approval;

 

·advertising and promotion;

 

·marketing, manufacturing, sales and distribution;

 

·relationships and communications with health care providers;

 

·adverse event reporting;

 

·market exclusivity;

 

·servicing and post-market surveillance; and

 

·recalls and field safety corrective actions.

 

Before we can market or sell a new regulated product or a significant modification to an existing product in the U.S., we must obtain either marketing clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or FDCA, or approval of a Pre-Market Approval, or PMA, application from the FDA, unless an exemption from premarket clearance and approval applies. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Clinical data are sometimes required to support a finding of substantial equivalence. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based on extensive clinical data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or certain implantable devices or products that do not have an adequate predicate product. The PMA process can be lengthy, expensive, and carries uncertainty of approval. Products that are approved through a PMA application generally need FDA approval before they can be modified. Similarly, some modifications made to products cleared through a 510(k) premarket notification submission may require a new 510(k) submission, including possibly with clinical data. Before we can offer our device products to any of the 31 nations within the EU and the European Free Trade Association, we must first satisfy the requirements for CE Mark clearance, a conformity mark that signifies a product has met all criteria of the relevant EU directives, especially in the areas of safety and performance. The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time-consuming, and we may not be able to obtain these clearances or approvals on a timely basis, or at all for our products or proposed products. We obtained CE Mark clearance for our BF-RhodoLED® lamp in November 2012 and FDA approval for it, to be used in connection with Ameluz® gel, in May 2016.

 

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The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

 

·our inability to demonstrate that our products are safe and effective for their intended uses or substantially equivalent to a predicate device;

 

·the data from our clinical trials may not be sufficient to support clearance or approval; and

 

·the manufacturing process or facilities we use may not meet applicable requirements.

 

In addition, the FDA and other regulatory authorities may change their respective clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our products under development or impact our ability to modify our currently cleared or approved products on a timely basis.

 

Any delay in, or failure to receive or maintain, clearance or approval for our products under development could prevent us from generating revenue from these products or achieving profitability. Additionally, the FDA and comparable foreign regulatory authorities have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny of us, could dissuade some customers from using our products and adversely affect our reputation and the perceived safety and efficacy of our products.

 

Failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as fines, civil penalties, injunctions, warning letters, Form 483 reports, recalls of products, delays in the introduction of products into the market, refusal of the FDA or other regulators to grant future clearances or approvals, and the suspension or withdrawal of existing approvals by the FDA or other regulators. Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, financial condition and operating results.

 

Furthermore, we may evaluate international expansion opportunities in the future for our medical device products. As we expand our operations outside of the U.S. and Europe, we are, and will become, subject to various additional regulatory and legal requirements under the applicable laws and regulations of the international markets we enter. These additional regulatory requirements may involve significant costs and expenditures and, if we are not able comply with any such requirements, our international expansion and business could be significantly harmed.

 

Modifications to our medical device products, such as our BF-RhodoLED® lamp in Europe, may require reclassifications, new CE marking processes or may require us to cease marketing or recall the modified products until new CE marking is obtained.

 

A modification to our medical devices such as our BF-RhodoLED® lamp, which is approved for sale in Europe, could lead to a reclassification of the medical device and could result in further requirements (including additional clinical trials) to maintain the product’s CE marking. If we fail to comply with such further requirements we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.

 

We are highly dependent on our key personnel, and if we are not successful in attracting and retaining highly qualified personnel, we may be unable to successfully implement our business strategy.

 

Our ability to compete in the highly competitive pharmaceutical industry depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel with specialized scientific and technical skills. We are highly dependent on our management, scientific, medical and operations personnel, including Prof. Hermann Lübbert, Ph.D., chairman of our management board and chief executive officer; Thomas Schaffer, member of our management board and chief financial officer and Christoph Dünwald, member of our management board and chief commercial officer. Our company does not maintain “key man” insurance for any of our officers. The loss of the services of any of our executive officers or other key employees and our inability to find suitable replacements could potentially harm our business, prospects, financial condition or results of operations.

 

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Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Although we have employment agreements with our key employees, these employees could leave our employment at any time, with certain notice periods. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel and sales representatives.

 

Many of the other biotechnology and pharmaceutical companies that we compete against for qualified personnel have greater financial and other resources, different risk profiles and a longer history in the industry than we do. They may also provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than what we can offer. If we are unable to continue to attract and retain high quality personnel, our ability to advance the development of our product candidates, obtain regulatory approval and commercialize our product candidates will be limited.

 

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

 

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA or EMA regulations, provide accurate information to the FDA or EMA, comply with manufacturing standards we have established, comply with healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices in the U.S. and Europe as well as in other jurisdictions where we conduct our business. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions, inability to obtain product approval and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and any precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

 

We will need to grow the size of our organization and we may experience difficulties in managing this growth.

 

As of September 30, 2017, we had 125 employees. As our development and commercialization plans and strategies develop, and as we continue operating as a public company, we expect to need additional managerial, operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including:

 

·identifying, recruiting, integrating, maintaining and motivating additional employees;

 

·managing our internal development efforts effectively, including the clinical and FDA and EMA review process for our product candidates, while complying with our contractual obligations to contractors and other third parties; and

 

·improving our operational, financial and management controls, reporting systems and procedures.

 

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Our future financial performance and our ability to commercialize our products will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities. To date, we have used the services of outside vendors to perform tasks including clinical trial management, statistics and analysis and regulatory affairs. Our growth strategy may also entail expanding our group of contractors or consultants to implement these tasks going forward. Because we rely on numerous consultants, effectively outsourcing many key functions of our business, we will need to be able to effectively manage these consultants to ensure that they successfully carry out their contractual obligations and meet expected deadlines. However, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all. If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our products and product candidates that we develop and, accordingly, may not achieve our research, development and commercialization goals.

 

We may encounter difficulties growing our sales force.

 

Our initial estimate of the size of the required sales force may be materially different from the size of the sales force actually required to effectively commercialize our product candidates. As such, we may be required to hire substantially more sales representatives to adequately support the commercialization of our products and product candidates or we may incur excess costs as a result of hiring more sales representatives than necessary. With respect to certain geographical markets, we may enter into collaborations with other entities to utilize their local marketing and distribution capabilities, but we may be unable to enter into such agreements on favorable terms, if at all. If our future collaborators do not commit sufficient resources to commercialize our future products, if any, and we are unable to develop the necessary marketing capabilities on our own, we will be unable to generate sufficient product revenue to sustain our business. We may be competing with companies that currently have extensive and well-funded marketing and sales operations.

 

Certain of our employees and patents are subject to foreign laws.

 

A majority of our employees work in Germany and are subject to German employment law. Ideas, developments, discoveries and inventions made by such employees and consultants are subject to the provisions of the German Act on Employees’ Inventions, which regulates the ownership of, and compensation for, inventions made by employees. We face the risk that disputes can occur between us and our employees or former employees pertaining to alleged non-adherence to the provisions of this act that may be costly to defend and take up our management’s time and efforts whether we prevail or fail in any such dispute. There is a risk that the compensation we provided to employees who assign patents to us may be deemed to be insufficient and we may be required under German law to increase the compensation due to such employees for the use of the patents. In those cases where employees have not assigned their interests to us, we may need to pay compensation for the use of those patents. If we are required to pay additional compensation or face other disputes under the German Act on Employees’ Inventions, our results of operations could be adversely affected.

 

We believe that our success depends, in part, upon our ability to protect our intellectual property throughout the world. However, the laws of some foreign countries, including Germany, may not be as comprehensive as those of the U.S. and may not be sufficient to protect our proprietary rights. In addition, we generally do not pursue patent protection in all jurisdictions because of cost and confidentiality concerns. Accordingly, our international competitors could obtain foreign patent protection for, and market overseas, products and technologies for which we are seeking patent protection in the U.S.

 

A variety of risks associated with commercializing our products and product candidates internationally could materially adversely affect our business.

 

We, or our licensing partners, may seek regulatory approval for our product candidates outside of the U.S. and EU and, accordingly, we expect that we will be subject to additional risks for our products and product candidates related to operating in foreign countries if we obtain the necessary approvals, including:

 

·differing regulatory requirements in foreign countries;

 

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·the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;

 

·unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;

 

·economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

·compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

·foreign taxes, including withholding of payroll taxes;

 

·foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;

 

·difficulties staffing and managing foreign operations;

 

·workforce uncertainty in countries where labor unrest is more common than in Germany or the U.S.;

 

·potential liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign regulations;

 

·challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as in the EU or the U.S.;

 

·production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

·business interruptions resulting from geo-political actions, including war and terrorism.

 

These and other risks associated with our or our licensing partners’ international operations may materially adversely affect our ability to attain or maintain profitable operations.

 

Our business and operations would suffer in the event of system failures.

 

Despite the implementation of security measures, our internal computer systems and those of our current and future clinical research organizations, or CROs, and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our products and product candidates could be delayed.

 

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If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our products.

 

We face an inherent risk of product liability as a result of the clinical testing of our products and face an even greater risk if we commercialize our products on a larger scale. For example, we may be sued if our products allegedly cause injury or are found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing; defects in design; a failure to warn of dangers inherent in the product, negligence, strict liability; and a breach of warranties. Claims could also be asserted under state consumer protection acts. In Europe, medical products and medical devices may, under certain circumstances, be subject to no-fault liability. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products and product candidates. Even a successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

·costs to defend litigation and other proceedings;

 

·a diversion of management’s time and our resources;

 

·decreased demand for our products;

 

·injury to our reputation;

 

·withdrawal of clinical trial participants;

 

·initiation of investigations by regulators;

 

·product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

·loss of revenue;

 

·substantial monetary awards to trial participants or patients;

 

·exhaustion of any available insurance and our capital resources;

 

·the inability to commercialize our products; and

 

·a decline in our share or ADS price.

 

We currently maintain product liability insurance. If such insurance is not sufficient, or if we are not able to obtain such insurance at an acceptable cost in the future, potential product liability claims could prevent or inhibit the commercialization of our products and the products we develop. A successful claim could materially harm our business, financial condition or results of operations. Additionally, we cannot guarantee that continued product liability insurance coverage will be available in the future at acceptable costs.

 

Our international operations may pose currency risks, which may adversely affect our operating results and net income.

 

Our operating results may be affected by volatility in currency exchange rates and our ability to effectively manage our currency transaction risks. In general, we conduct our business, earn revenues and incur costs in the local currency of the countries in which we operate. In 2016, 80% of our revenue was generated and approximately 71% of our costs were incurred in euros (54% and 47%, respectively, for the nine months ended September 30, 2017). Although currency exchange rate fluctuations have not had an impact on our operations to date, as we execute our strategy to expand in the U.S. and internationally, our exposure to currency risks will increase. We do not manage our foreign currency exposure in a manner that would eliminate the effects of changes in foreign exchange rates. Therefore, changes in exchange rates between these foreign currencies, the dollar and the euro will affect our revenues, cost of goods sold, and operating margins, and could result in exchange losses in any given reporting period.

 

We incur currency transaction risks whenever we enter into either a purchase or a sale transaction using a different currency from the currency in which we report revenues. In such cases we may suffer an exchange loss because we do not currently engage in currency swaps or other currency hedging strategies to address this risk.

 

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Given the volatility of exchange rates, we can give no assurance that we will be able to effectively manage our currency transaction risks or that any volatility in currency exchange rates will not have an adverse effect on our results of operations.

 

Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation could result in fines, criminal penalties and an adverse effect on our business.

 

We operate in a number of countries throughout the world. We are committed to doing business in accordance with applicable anti-corruption laws. We are subject, however, to the risk that our officers, directors, employees, agents and collaborators may take action determined to be in violation of such anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, the U.K. Bribery Act 2010 and the European Union Anti-Corruption Act, as well as trade sanctions administered by the U.S. Office of Foreign Assets Control and the U.S. Department of Commerce. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties or curtailment of operations in certain jurisdictions, and might adversely affect our results of operations. In addition, actual or alleged violations could damage our reputation and ability to do business.

 

Global economic, political and social conditions have adversely impacted our sales and operations and may continue to do so.

 

The uncertain direction and relative strength of the global economy, difficulties in the financial services sector and credit markets, continuing geopolitical uncertainties and other macroeconomic factors all affect spending behavior of potential end-users of our products. The prospects for economic growth in Europe, the U.S. and other countries remain uncertain and may cause end-users to further delay or reduce purchases of drugs or therapies that are not fully reimbursed by governmental or other third party payors. In particular, a substantial portion of our sales are made to customers in countries in Europe, which is experiencing a significant economic crisis. If global economic conditions remain volatile for a prolonged period or if European economies experience further disruptions, our results of operations could be adversely affected. The global financial crisis affecting the banking system and financial markets has resulted in a tightening of credit markets, lower levels of liquidity in many financial markets and extreme volatility in fixed income, credit, currency and equity markets.

 

Our products may become obsolete prior to the end of their anticipated useful lives, and we may be required to dispose of existing inventory or write off the value or accelerate the depreciation of those assets, each which would materially and adversely impact our results of operations.

 

We focus on continual product innovation and product improvement. While we believe this provides a competitive edge, it also results in the risk that our products will become obsolete prior to the end of their anticipated useful lives. If we introduce new products or next generation products prior to the end of the useful life of a prior generation, we may be required to dispose of existing inventory, or write off the value of these assets, each of which would materially and adversely impact our results of operations.

 

Our business involves environmental risks and we may incur significant costs complying with environmental laws and regulations.

 

We are subject to federal, state, local and foreign laws and regulations which govern the use, manufacture, storage handling and disposal of hazardous materials and specific waste products. We believe that we are in compliance in all material respects with currently applicable environmental laws and regulations. However, we cannot guarantee that we will not incur significant costs to comply with environmental laws and regulations in the future. We also cannot guarantee that current or future environmental laws or regulations will not materially adversely affect our operations, business or financial condition. In addition, although we believe our safety procedures for handling and disposing of these materials comply with federal, state, local and foreign laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for any resulting damages, and this liability could exceed our resources.

 

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Risks Related to the Clinical Development and Regulatory Approval of Our Products

 

Our business depends substantially on the success of our principal product Ameluz®. If we are unable to successfully commercialize Ameluz®, to obtain and maintain regulatory approvals or reimbursement for Ameluz® for existing and additional indications and/or in additional countries, or if we experience significant delays in realizing any of those commercialization or product development objectives, our business may be materially harmed.

 

We have invested a significant portion of our efforts and financial resources in the development of Ameluz®, which has received marketing approval in the U.S. for lesion- and field-directed treatment of actinic keratosis and in the EU for actinic keratosis, field cancerization and basal cell carcinoma. Although we have received these approvals, there remains a significant risk that we will fail to generate sufficient revenue or otherwise successfully commercialize these products in the EU or the U.S. The success of our products will depend on several factors, including:

 

·successful completion of further clinical trials;

 

·receipt of further regulatory approvals, including for the marketing of Ameluz® for additional indications and/or in additional countries;

 

·obtaining adequate reimbursement from governments and other third party payors for Ameluz®;

 

·maintaining regulatory compliance for our contract manufacturing facility and sales force;

 

·manufacturing sufficient quantities in acceptable quality;

 

·achieving meaningful commercial sales of our products;

 

·sourcing sufficient quantities of raw materials used to manufacture our products;

 

·successfully competing with other products;

 

·continued acceptable safety and effectiveness profiles for our products following regulatory approval and marketing;

 

·obtaining and maintaining patent and trade secret protection and regulatory exclusivity; and

 

·protecting our intellectual property rights.

 

If we do not achieve one or more of these factors in a timely manner, or at all, we could experience significant delays or an inability to successfully commercialize our products, which would materially harm our business and we may not be able to earn sufficient revenue and cash flows to continue our operations.

 

Our ability to generate future revenues depends heavily on our success in:

 

·maintaining and extending U.S., EU and/or other foreign regulatory approvals for our products;

 

·manufacturing commercial quantities of our products at acceptable costs;

 

·successfully commercializing our products, and

 

·achieving broad market acceptance of our products and product candidates in the medical community and with the government and other third party payors and patients.

 

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Clinical drug development is expensive and involves uncertain outcomes, and results of earlier studies and trials may not be predictive of future trial results. If one or more future Phase III clinical trials for Ameluz® were unsuccessful, or significantly delayed, we could be required to abandon development, we may suffer reputational harm and our business will be materially harmed.

 

If the results of our clinical trials for our current products or product candidates or clinical trials for any future product candidates do not achieve their primary efficacy endpoints or raise unexpected safety issues, the prospects for approval of our product candidates or the extension of indications for our products will be materially adversely affected. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have failed to achieve similar results in later clinical trials, or have ultimately failed to obtain regulatory approval of their product candidates. Many products that initially showed promise in clinical trials or earlier stage testing have later been found to cause undesirable or unexpected adverse effects that have prevented their further development and regulatory approval. Our ongoing trial for basal cell carcinoma may not produce the results that we expect or that are required to achieve FDA approval.

 

In addition, we may experience numerous unforeseen events that could cause our clinical trials to be delayed, suspended or terminated, or which could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including that:

 

·clinical trials of our products and product candidates may produce negative, inconclusive or inconsistent results, and we may decide, or regulators may require us, to conduct additional clinical trials or implement a clinical hold;

 

·we may elect or be required to suspend or terminate clinical trials of our products and product candidates, including based on a finding that the participants are being exposed to unacceptable health risks;

 

·regulators or institutional review boards may not authorize us or our investigators to commence or continue a clinical trial, or may require additional data before allowing clinical trials to commence, continue or proceed from one phase to another, or conduct, or continue a clinical trial at a prospective trial site;

 

·our third party contractors may fail to comply with regulatory requirements, such as good clinical practice requirements, fail to follow approved study protocols, or fail to meet their contractual obligations to us in a timely manner, or at all;

 

·the cost of clinical trials for our products and product candidates may be greater than we anticipate;

 

·changes in government regulation or administrative actions;

 

·the supply of materials necessary to conduct clinical trials of our products and product candidates may be insufficient or inadequate; and

 

·our products and product candidates may have undesirable adverse effects or other unexpected characteristics.

 

If we experience delays in the completion of, or termination of, any clinical trial of our products and product candidates, the commercial prospects of our products and product candidates will be materially harmed, and our ability to generate product revenues from any of these products and product candidates, if any, will cease or be delayed. We may have to repeat or redesign clinical trials, which could delay the regulatory approval process. In addition, any termination of, or delays in completing, our clinical trials will increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenue. Any of these occurrences may significantly harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to a delay in the commencement or completion of or early termination of, clinical trials may also ultimately lead to the denial of regulatory approval of our products and product candidates.

 

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We will be subject to ongoing regulatory requirements in every market where we engage in business and we may face future development, manufacturing and regulatory difficulties.

 

Our drug product Ameluz® and any other drug products we develop will be subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, sampling, record-keeping, submission of safety and other post-market approval information, importation and exportation. In addition, approved products, manufacturers and manufacturers’ facilities are required to comply with extensive FDA and EMA requirements and the requirements of other similar regulatory authorities, including ensuring that quality control and manufacturing procedures conform to cGMP requirements.

 

Accordingly, we will be required to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA and EMA and other similar regulatory authorities and to comply with certain requirements concerning advertising and promotion for our potential products.

 

If a regulatory authority discovers previously unknown problems with a product, such as adverse events of unanticipated or unacceptable severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, it may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If our products or potential products fail to comply with applicable regulatory requirements, a regulatory authority may, among other actions:

 

·issue warning letters or Form 483 (or similar) notices requiring us to modify certain activities or correct certain deficiencies;

 

·require product recalls or impose civil monetary fines;

 

·mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

 

·require us or our potential future collaborators to enter into a consent decree or permanent injunction;

 

·impose other administrative or judicial civil or criminal actions, including monetary or other penalties, or pursue criminal prosecution;

 

·withdraw regulatory approval;

 

·refuse to approve pending applications or supplements to approved applications filed by us or by our potential future collaborators;

 

·impose restrictions on operations, including costly new manufacturing requirements; or

 

·seize or detain products.

 

Risks Related to Our Dependence on Third Parties

 

We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.

 

We have engaged third party CROs in connection with our Phase III clinical trials for our products and product candidates and will continue to engage such CROs in the future. We will rely heavily on these parties for proper execution of our clinical trials, and we will control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with applicable protocol, legal and regulatory requirements, and scientific standards, and our reliance on our CROs does not relieve us of our regulatory responsibilities. We and our CROs will be required to comply with current Good Clinical Practices, or cGCP requirements, which are a collection of regulations enforced by the FDA or comparable foreign regulatory authorities for products and product candidates in clinical development in order to protect the health, safety and welfare of patients and assume the integrity of clinical data. These requirements are also intended to protect the health, safety and welfare of study subjects through requirements such as informed consent. The FDA enforces good clinical practices through periodic inspections of trial sponsors, principal investigators and trial sites. In Phase I, the initial introduction of the drug into human subjects, the drug is typically tested to assess the pharmacological actions and side effects associated with increasing doses. Phase II usually involves clinical trials in a limited patient population to determine the effectiveness of the drug for a particular indication or indications, dosage tolerance and optimum dosage and to identify common adverse effects and safety risks. If a drug demonstrates evidence of effectiveness and an acceptable safety profile in Phase II, Phase III clinical trials are undertaken to obtain additional information about clinical efficacy and safety in a larger number of patients. Throughout this process, regulatory authorities enforce these cGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these CROs fail to comply with applicable cGCP regulations or record-keeping requirements at any point during the clinical trial process, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or EMA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications or, in some instances, require us to suspend operations. We cannot assure you that, upon inspection, such regulatory authorities will determine that any of our clinical trials comply with the cGCP regulations. In addition, for drugs, our clinical trials must be conducted with products produced under cGMP regulations and will require a large number of test subjects. For our devices, clinical trials must use product manufactured in compliance with design controls under the QSR. Our failure or any failure by our CROs to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the regulatory approval process. Moreover, we may be implicated if any of our CROs violate federal, state, local or foreign fraud and abuse or false claims laws and regulations, or healthcare privacy and security laws.

 

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The CROs will not be employed directly by us and, except for remedies available to us under our agreements with such CROs, we cannot control whether they devote sufficient time and resources to our ongoing preclinical, clinical and nonclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other product development activities, which could affect their performance on our behalf. If the CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to complete development of, obtain regulatory approval for or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for our products and product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

 

Switching or adding CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. Although we plan to carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, prospects, financial condition and results of operations.

 

We rely on third parties for the supply of raw materials and manufacture of our principal product.

 

We rely on third parties for the timely supply of raw materials and for the manufacture of Ameluz®. Although we actively manage these third party relationships to provide continuity and quality, some events which are beyond our control could result in the complete or partial failure of these goods and services. Any such failure could have a material adverse effect on our financial condition and operations.

 

We currently license the commercialization rights for some of our products outside of the U.S., Germany, Spain and the UK, which exposes us to additional risks of conducting business in international markets.

 

Markets outside the U.S. and Germany are an important component of existing commercialization strategy for our existing marketed products as well as part of our growth strategy for Ameluz®. We have entered into commercial supply agreements for Ameluz® and BF-RhodoLED® lamps pursuant to which we exclusively supply and our partners exclusively purchase the products from us in their respective territories, as described in greater detail under “Business — Commercial Partners and Agreements.” Our agreements require us to timely supply products that meet the agreed quality standards and require our customers to purchase products from us, in some cases in specified minimum quantities. If we fail to maintain these agreements and agreements with other partners or to enter into new distribution arrangements with selling parties, or if these parties are not successful, our revenue-generating growth potential will be adversely affected. Moreover, international business relationships subject us to additional risks that may materially adversely affect our ability to attain or sustain profitable operations, including:

 

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·efforts to enter into distribution or licensing arrangements with third parties in connection with our international sales, marketing and distribution efforts may increase our expenses or divert our management’s attention from the development of product candidates;

 

·changes in a specific country’s or region’s political and cultural climate or economic condition;

 

·differing requirements for regulatory approvals and marketing internationally;

 

·difficulty of effective enforcement of contractual provisions in local jurisdictions;

 

·potentially reduced protection for intellectual property rights;

 

·potential third party patent rights in countries outside of the U.S. or the EU;

 

·unexpected changes in tariffs, trade barriers and regulatory requirements;

 

·economic weakness, including inflation, or political instability;

 

·compliance with tax, employment, immigration and labor laws for employees traveling abroad;

 

·the effects of applicable foreign tax structures and potentially adverse tax consequences;

 

·foreign currency fluctuations, which could result in increased operating expenses and reduced revenue and other obligations incidental to doing business in another country;

 

·workforce uncertainty in countries where labor unrest is more common than in the U.S. or Germany;

 

·the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;

 

·failure of our employees and contracted third parties to comply with U.S. Office of Foreign Asset Control rules and regulations and the U.S. Foreign Corrupt Practices Act or comparable foreign regulations;

 

·production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

·business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.

 

These and other risks may materially adversely affect our ability to attain or sustain revenue from international markets.

 

We may form or seek strategic alliances in the future and we may not realize the benefits of such alliances.

 

We may form or seek strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement or augment our development and commercialization efforts with respect to our products and any future products that we may develop. Any of these relationships may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing holders of our shares or ADSs or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture and vice versa. We cannot be certain that, following a strategic transaction or license, we will achieve the revenue or specific net income that justifies such transaction. Any delays in entering into new strategic partnership agreements related to our products or product candidates could delay the development and commercialization of our products or product candidates in certain geographies or for certain indications, which would harm our business prospects, financial condition and results of operations.

 

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Risks Related to Our Intellectual Property

 

If our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, we may not be able to compete effectively in our market.

 

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our technologies and products. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market.

 

In addition, the patent applications that we own or that we may license may fail to result in issued patents in the U.S., the EU or in other countries or jurisdictions. Even if the patents do successfully issue, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around our claims. If the breadth or strength of protection provided by the issued patents and patent applications we hold with respect to our products is threatened, it could dissuade companies from collaborating with us to develop, and threaten our ability to commercialize, our products. Further, if we encounter delays in our clinical trials, the period of time during which we could market our products under patent protection would be reduced. Since patent applications in the U.S. and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our product candidates. Furthermore, for applications in which all claims are entitled to a priority date before March 16, 2013, an interference proceeding can be provoked by a third party or instituted by the U.S. Patent and Trademark Office, or USPTO, to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. For applications containing a claim not entitled to priority before March 16, 2013, there is greater level of uncertainty in the patent law with the passage of the America Invents Act (2012) which brings into effect significant changes to the U.S. patent laws that are yet untried and untested, and which introduces new procedures for challenging pending patent applications and issued patents. A primary change under this reform is creating a “first to file” system in the U.S. This will require us to be cognizant going forward of the time from invention to filing of a patent application.

 

In addition to the protection afforded by patents, we seek to rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our product discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. Although we require all of our employees to assign their inventions to us to the extent permitted by law, and require all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Furthermore, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the U.S. or the EU. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the U.S., in the EU and in other countries. If we are unable to prevent unauthorized material disclosure of our intellectual property to third parties, we may not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and financial condition.

 

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Third party claims of intellectual property infringement may prevent or delay our product discovery and development efforts.

 

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, as well as administrative proceedings for challenging patents, including interference and reexamination proceedings before the USPTO, or oppositions and other comparable proceedings in foreign jurisdictions. Recently, following U.S. patent reform, new procedures including inter partes review and post grant review have been implemented. This reform includes changes in law and procedures that are untried and untested and will bring uncertainty to the possibility of challenge to our patents in the future. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing our product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our products may give rise to claims of infringement of the patent rights of others.

 

Third parties may assert that we are employing their proprietary technology without authorization. There may be third party patents of which we are currently unaware with claims to materials, formulations, devices, methods of manufacture or methods for treatment related to the use or manufacture of our products. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon such patents. If any third party patents were held by a court of competent jurisdiction to cover the manufacturing process of our products or product candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize the product unless we obtained a license under the applicable patents, or until such patents expire or they are finally determined to be held invalid or unenforceable. Similarly, if any third party patent were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy or patient selection methods, the holders of any such patent may be able to block our ability to develop and commercialize the product unless we obtained a license or until such patent expires or is finally determined to be held invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all. If we are unable to obtain a necessary license to a third party patent on commercially reasonable terms, or at all, our ability to commercialize our products or product candidates may be impaired or delayed, which could in turn significantly harm our business.

 

Parties making claims against us may seek and obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize our products and product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our products or product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize our products or product candidates, which could harm our business significantly.

 

We may be involved in lawsuits to defend or enforce our patents, which could be expensive, time-consuming and unsuccessful.

 

Competitors may infringe upon our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that one or more of our patents is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable, or interpreted narrowly and could put our patent applications at risk of not issuing. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim or counterclaim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure.

 

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Interference or derivation proceedings provoked by third parties or brought by the USPTO may be necessary to determine the priority of inventions with respect to our patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent misappropriation of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the U.S. or the EU.

 

Furthermore, because of the substantial amount of discovery that could be required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our shares and ADSs.

 

Obtaining and maintaining our patent protection depends on compliance with various procedures, document submission requests, fee payments and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance with these requirements.

 

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and patent agencies in other jurisdictions in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, our competitors might be able to enter the market, which would have a material adverse effect on our business.

 

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

 

We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of these third parties or our employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

 

We may not be able to protect our intellectual property rights throughout the world.

 

Filing, prosecuting and defending patents on all of our products and product candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection, but where enforcement is not as strong as that in the U.S. and the EU. These products may compete with our products in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

 

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

 

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Our trade secrets are difficult to protect.

 

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property.

 

Our success depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors as well as our partners, licensors and contractors. Because we operate in a highly competitive technical field of drug development, we rely in part on trade secrets to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We enter into confidentiality agreements with our corporate partners, employees, consultants, sponsored researchers and other advisors. These agreements typically require that the receiving party keep confidential and not disclose to third parties all confidential information developed by the receiving party or made known to the receiving party by us during the course of the receiving party’s relationship with us. Our agreements also provide that any inventions made based solely upon our technology are our exclusive property, and we enter into assignment agreements that are recorded in patent, trademark and copyright offices around the world to perfect our rights.

 

These confidentiality and assignment agreements may be breached and may not effectively assign intellectual property rights to us. Our trade secrets also could be independently discovered by competitors, in which case, we would not be able to prevent use of such trade secrets by our competitors. The enforcement of a claim alleging that a party illegally obtained and was using our trade secrets could be difficult, expensive and time consuming and the outcome would be unpredictable. In addition, courts outside the U.S. or the EU may be less willing to protect trade secrets. There exists a risk that we may not be able to detect when misappropriation of our trade secrets has occurred or where a third party is using our trade secrets without our knowledge. The failure to obtain or maintain meaningful trade secret protection could adversely affect our competitive position.

 

Generic manufacturers may launch products at risk of patent infringement.

 

If other manufacturers launch products to compete with our products or product candidates in spite of our patent position, these manufacturers would likely erode our market and negatively impact our sales revenues, liquidity and results of operations.

 

Risks Related to the Offering and Ownership of our ADSs

 

An active trading market for our ADSs may not develop or be sustained.

 

Prior to the offering contemplated by this prospectus, there has been no public market for our ADSs in the U.S. An active trading market for our ADSs may not develop or be sustained. If an active market for our ADSs does not develop or continue, it may be difficult for the holders to sell our ADSs without depressing the market price for our ADSs or to sell our ADSs at or above the prices at which they acquired our ADSs or to sell our ADSs at the time they would like to sell. The initial public offering price of our ADSs will be determined through negotiations between us and the underwriters. The initial public offering price may not be indicative of the market price of our ADSs after the offering. Any inactive trading market for our ADSs may also impair our ability to raise capital to continue to fund our operations by selling our ADSs and may impair our ability to acquire other companies or technologies by using our ADSs as consideration.

 

There has been varying trading volume for our ordinary shares.

 

Each ADS represents [two] ordinary shares of our company. Even though our ordinary shares have been listed on the Stock Exchange in Düsseldorf since 2006 and the Frankfurt Stock Exchange since 2012, there has been limited liquidity in the market for our ordinary shares from time to time, which could make it more difficult for holders to sell our ordinary shares. We do not intend to directly list our ordinary shares on a U.S. trading market and, therefore, do not expect that a trading market will develop for our ordinary shares.

 

There can be no assurance that an active trading market for our ADSs will develop or be sustained.

 

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In addition, the stock market generally has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies. Broad market and industry factors may negatively affect the market price of our ordinary shares or ADSs, regardless of our actual operating performance. The market price and liquidity of the market for our ordinary shares or ADSs that will prevail in the market may be higher or lower than the price you pay and may be significantly affected by numerous factors, some of which are beyond our control.

 

The price of our ordinary shares or ADSs may be volatile, and you could lose all or part of your investment.

 

The trading price of our shares or ADSs is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including limited trading volume. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

 

·adverse results or delays in clinical trials;

 

·our failure to commercialize our products or product candidates;

 

·actual or anticipated variations in our operating results and our financial position;

 

·our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public and the publication of research reports about us or our industry;

 

·adverse regulatory decisions or changes in laws or regulations;

 

·introduction of new products or services offered by us or our competitors;

 

·our inability to obtain adequate product supply;

 

·our inability to establish collaborations, if needed;

 

·departures of key scientific or management personnel;

 

·our ability to successfully manage our growth and enter new markets;

 

·disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

·significant lawsuits, including patent or shareholder litigation; and

 

·other events or factors, many of which are beyond our control.

 

In addition, the stock market in general, and The NASDAQ Capital Market and pharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our shares or ADSs, regardless of our actual operating performance. If the market price of our ADSs does not exceed your purchase price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, operating results or financial condition.

 

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We have broad discretion to determine how to use the funds raised in this offering and may use them in ways that may not enhance our operating results or the price of our ADSs.

 

Our management will have broad discretion over the use of proceeds from this offering, and we could spend the proceeds from this offering in ways the holders of our ADSs may not agree with or that do not yield a favorable return, if any. We intend to use the net proceeds of this offering for the purposes described in the “Use of Proceeds” section of this prospectus. However, our use of these proceeds may differ substantially from our current plans. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. If we do not invest or apply the proceeds of this offering in ways that enhance our business, we may fail to achieve expected financial results, which could cause the price of our ADSs to decline.

 

The Share Loan arrangements may result in this offering being characterized as a secondary offering.

 

To facilitate the orderly closing of this offering of ADSs, and because of timing considerations related to the technical issuance and registration of new ordinary shares under German law, the shares underlying the ADSs immediately prior to and concurrent with the consummation of this offering and the time of delivery of the ADSs will be Borrowed Shares loaned by Maruho Deutschland GmbH to Lang & Schwarz Broker GmbH, acting as our agent, for deposit with the custodian for the Depositary under the ADS facility. In connection with the consummation of this offering and as promptly as practicable after the delivery of the ADSs, newly issued ordinary shares of our company of equal number will be delivered to Maruho Deutschland GmbH in repayment and satisfaction in full of the Share Loan. The Borrowed Shares will be retained by the custodian for the Depositary.

 

All proceeds of this offering net of expenses are being paid to us. No proceeds of this offering are for the account of any shareholder. In the event we are not able to issue on a timely basis the newly issued shares as contemplated by the share loan agreement governing the settlement arrangements, or if the Borrowed Shares are not delivered to Maruho Deutschland GmbH on a timely basis, then this offering may constitute a secondary offering.

 

In such event, Maruho Deutschland GmbH would have a cause of action against Lang & Schwarz Broker GmbH and us for the return of the Borrowed Shares, the issuance of an equal number of newly issued shares or monetary damages. Under German law and the share loan agreement, Maruho Deutschland GmbH would not be able to demand a return of the loaned shares from the Depositary under the ADS facility or its custodian. We have agreed to indemnify and hold harmless each of Lang & Schwarz GmbH, [the underwriters] and Maruho Deutschland GmbH for any damages in connection with the share loan agreement and the transactions contemplated thereunder.

 

We are an emerging growth company, and the reduced reporting requirements applicable to emerging growth companies may make our ADSs less attractive to investors.

 

We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company until the earliest of the end of the fiscal year corresponding with the fifth anniversary of our initial public offering, the date on which we qualify as a “large accelerated filer” under U.S. securities laws, the end of the fiscal year in which our annual revenue is $1,070,000,000 or more, or the date on which we issue more than $1,000,000,000 in non-convertible debt during any prior three-year period. Our investors may find our ADSs less attractive because we may rely on these exemptions. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and our ADS price may be more volatile.

 

Under the JOBS Act, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We currently prepare our financial statements in accordance with IFRS as issued by the IASB, which do not have separate provisions for publicly traded and private companies. However, in the event we convert to generally accepted accounting principles in the U.S., or U.S. GAAP, while we are still an emerging growth company, we may be able to take advantage of the benefits of this extended transition period.

 

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We have no present intention to pay dividends on our ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of our ADSs appreciates.

 

We have no present intention to pay dividends on our ordinary shares in the foreseeable future. Any recommendation by our supervisory and management boards to pay dividends will depend on many factors, including our financial condition, results of operations, legal requirements and other factors. In addition, under the EIB credit facility we are not permitted to pay dividends to shareholders without the prior consent of EIB. Accordingly, if the price of our ADSs declines in the foreseeable future, you will incur a loss on your investment, without the likelihood that this loss will be offset in part or at all by potential future cash dividends.

 

As a new investor, you will experience substantial dilution as a result of this offering.

 

The public offering price per ADS will be substantially higher than the as adjusted net tangible book value per ADS before giving effect to this offering. Accordingly, if you invest in the ADSs in this offering, you will incur immediate substantial dilution of approximately €[____] per ADS ($[____]) (based on the net tangible book value per share underlying the ADSs), assuming: (i) initial public offering price of $[____] per ADS (€[____]), (ii) timely waiver by certain of our shareholders of its rights to purchase [______] million newly issued shares pursuant to the German preemptive rights offering and (iii) the full exercise of preemptive rights that are not assumed to have been waived under the German preemptive rights offering. Furthermore, if the underwriters exercise their over-allotment option to purchase additional ADSs or if outstanding options or convertible bonds are subsequently exercised or converted, you could experience further dilution. This dilution is due in large part to the fact that our earlier investors paid substantially less than the assumed public offering price when they purchased their ordinary shares. For further information regarding the dilution resulting from this offering, please see the section of this prospectus entitled “Dilution”.

 

Raising additional capital may cause additional dilution of the percentage ownership of the holders of our ADSs, restrict our operations, require us to relinquish rights to our technologies, products or product candidates and could cause our ADS price to fall.

 

We expect that significant additional capital may be needed in the future to continue our planned operations, including conducting clinical trials, commercialization efforts, expanded research and development activities and costs associated with operating a public company in the U.S. and Germany. To raise capital, we may sell ordinary shares, ADSs, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell ordinary shares, ADSs, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing holders of ADSs, and new investors could gain rights, preferences and privileges senior to the holders of our ordinary shares or ADSs. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, products or product candidates, or grant licenses on terms unfavorable to us.

 

We have created four sets of “contingent capital” (bedingtes Kapital) which, under German corporate law, means ordinary shares that we have been approved to issue, in the future, upon the exercise or conversion of specified outstanding options, warrants, convertible bonds or other convertible securities, totaling up to 6,994,985 ordinary shares, of which we expect to use 542,400 ordinary shares to cover issuances of ordinary shares pursuant to our 2010 employee stock option plan and 1,814,984 ordinary shares to cover issuances of ordinary shares pursuant to our 2015 employee stock option plan. We expect up to 246,515 shares would be used to cover issuances of ordinary shares pursuant to our 2009/2017 warrant bond, which was repaid in full on August 3, 2017. The remaining 4,137,601 ordinary shares from contingent capital may be used by our company for the issuance of shares to holders of convertible bonds if the repayment price is covered by issuing shares. Our management board, with the approval of our supervisory board, can increase our capital by these amounts and issue new ordinary shares in a corresponding amount without additional shareholder approval and can, to a limited extent, exclude subscription rights of our shareholders in connection therewith (see “Description of Share Capital”). If beneficiaries exercise their options or additional ordinary shares are issued under any of our authorized capital or our contingent capital, you may experience additional dilution, which could cause our ADS price to fall.

 

We have also created one set of authorized capital (genehmigtes Kapital) which, under German law, enables our management board, with prior approval of the supervisory board, to issue up to 6,000,000 of our ordinary shares.

 

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Substantial future sales of our ordinary shares or ADSs in the public market, or the perception that these sales could occur, could cause the price of the ADSs to decline.

 

Additional sales of our ordinary shares or ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of the ADSs to decline. Upon completion of this offering and the German preemptive rights offering (assuming timely waiver by certain of our shareholders of its rights to purchase [_________] million newly issued shares pursuant to the German preemptive rights offering), we will have approximately [_________] ADSs outstanding representing approximately [_________] ordinary shares. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act, except for any ADSs sold to our "affiliates" (subject to the terms of the lock-up agreements referred to below, as applicable). Neither Maruho Deutschland GmbH nor any of our other major shareholders will be subject to any lock-up agreements and may sell their shares at any time. Our chief executive officer will be subject to a lock-up agreement that provides that any ordinary shares or ADSs held by him will be available for sale upon the expiration of a lock-up period, which will expire 180 days after the date of this prospectus. Any or all of these ordinary shares or ADSs may be released prior to expiration of the lock-up period with the prior written consent of The Benchmark Company, LLC. To the extent ordinary shares or ADSs are released before the expiration of the lock-up period and these ordinary shares or ADSs are sold into the market, the market price of the ADSs could decline. See “Shares and ADSs Eligible for Future Sale” for" and "Underwriting" for a more detailed description of the terms of these "lock-up" arrangements.

 

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and share price.

 

As widely reported, global credit and financial markets have experienced extreme disruptions in the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and ADS price and could require us to delay or abandon clinical development or commercialization plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.

 

At September 30, 2017, we had approximately €13.3 million of cash and cash equivalents. While we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents since September 30, 2017, no assurance can be given that further deterioration of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or our ability to meet our financing objectives. Furthermore, our ADS price may decline due in part to the volatility of the stock market and the general economic downturn.

 

We could be subject to securities class action litigation.

 

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because pharmaceutical companies have experienced significant share price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

 

If securities or industry analysts cease publishing research, or publish inaccurate or unfavorable research about our business, our ADS price and trading volume could decline.

 

The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our shares or ADSs or publishes inaccurate or unfavorable research about our business, our share and ADS price may decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our shares and ADSs could decrease, which might cause our share and ADS price and trading volume to decline.

 

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As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than U.S. companies. This may limit the information available to holders of ADSs.

 

We are a “foreign private issuer,” as defined in the rules and regulations of the U.S. Securities and Exchange Commission, or SEC, and, consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the U.S. For example, we are exempt from certain rules under the U.S. Securities Exchange Act of 1934, or the Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, members of our supervisory board and management board and our principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less publicly available information concerning our company than there is for U.S. public companies.

 

As a foreign private issuer, we will file an annual report on Form 20-F within four months of the close of each year ended December 31 and furnish reports on Form 6-K relating to certain material events promptly after we publicly announce these events. However, we are not required to issue quarterly financial information because of the above exemptions for foreign private issuers, and holders of our ADSs will not be afforded the same protections or information generally available to investors holding shares in public companies organized in the U.S.

 

As we are a “foreign private issuer” that follows, and intends to continue to follow, certain home country corporate governance practices, holders of our ADSs may not have the same protections afforded to shareholders of companies that are subject to all The NASDAQ Capital Market corporate governance requirements.

 

As a foreign private issuer, we have the option to follow certain German corporate governance practices rather than those of The NASDAQ Capital Market, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following and describe the home country practices we follow instead. We intend to rely on this “foreign private issuer exemption” with respect to The NASDAQ Capital Market’s shareholder approval requirements in respect of equity issuances and equity-based compensation plans, the requirement to have independent oversight on our director nominations process and the quorum requirement for meetings of our shareholders. In addition, we intend to rely on the “foreign private issuer exemption” in the future with respect to The NASDAQ Capital Market requirement, once effective, to have a formal charter for the compensation committee. We may in the future elect to follow home country practices in Germany with regard to other matters. As a result, holders of our ADSs may not have the same protections afforded to shareholders of companies that are subject to all The NASDAQ Capital Market corporate governance requirements. See “Management — Differences between Our Corporate Governance Practices and the Rules of The NASDAQ Capital Market.”

 

We may lose our foreign private issuer status in the future, which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting and other expenses.

 

We are currently a foreign private issuer and, therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers. We would lose our foreign private issuer status if, for example, more than 50% of our assets are located in the U.S. and we continue to fail to meet additional requirements necessary to maintain our foreign private issuer status. As of September 30, 2017, a portion of our assets were located in the United States, although this may change as we expand our operations in the U.S.

 

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A foreign private issuer must determine its status on the last business day of its most recently completed second fiscal quarter. If a foreign private issuer no longer satisfies these requirements, it will become subject to U.S. domestic reporting requirements on the first day of its fiscal year immediately succeeding such determination. If we lost this status, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC and The NASDAQ Capital Market rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs and would make some activities highly time consuming and costly. We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers, it would make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members to our management board and supervisory board.

 

Your rights as a shareholder in a German corporation may differ from your rights as a shareholder in a U.S. corporation.

 

We are organized as a stock corporation (Aktiengesellschaft or AG) under the laws of Germany, and by participating in this offering you will become a holder of ADSs of a German stock corporation. You should be aware that the rights of shareholders of a German stock corporation under German law differ in important respects from those of shareholders of a U.S. corporation. These differences include, in particular:

 

·Under German law, certain important resolutions, including, for example, capital decreases, measures under the German Transformation Act, such as mergers, conversions and spin-offs, the issuance of convertible bonds or bonds with warrants attached and the dissolution of the German stock corporation apart from insolvency and certain other proceedings, require the vote of a 75% majority of the capital present or represented at the relevant shareholders’ meeting (Hauptversamlung). Therefore, the holder or holders of a blocking minority of 25% or, depending on the attendance level at the shareholders’ meeting, the holder or holders of a smaller percentage of the shares in a German stock corporation may be able to block any such votes, possibly to our detriment or the detriment of our other shareholders.

 

·As a general rule under German law, a shareholder has no direct recourse against the members of the management board (Vorstand) or supervisory board (Aufsichtsrat) of a German stock corporation in the event that it is alleged that they have breached their duty of loyalty or duty of care to the German stock corporation. Apart from insolvency or other special circumstances, only the German stock corporation itself has the right to claim damages from members of either board. A German stock corporation may waive or settle these damages claims only if at least three years have passed and the shareholders approve the waiver or settlement at the shareholders’ meeting with a simple majority of the votes cast, provided that a minority holding, in the aggregate, 10% or more of the German stock corporation’s share capital does not have its opposition formally noted in the minutes maintained by a German civil law notary.

 

·By subscribing or purchasing ADSs you will not become a shareholder of the Company.

 

For more information, we have provided summaries of relevant German corporation law and of our articles of association under “Management” and “Description of Share Capital.”

 

We may qualify as a passive foreign investment company, or “PFIC,” for U.S. federal income tax purposes which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs.

 

In general, we will be treated as a PFIC for any taxable year in which either (1) at least 75% of our gross income (looking through certain corporate subsidiaries) is passive income (this is known as the “income test”) or (2) at least 50% of the average value of our assets (looking through certain corporate subsidiaries) is attributable to assets that produce, or are held for the production of, passive income (this is known as the “asset test”). In the event we are treated as a PFIC, U.S. holders (as defined in "Taxation — U.S. Taxation of ADSs and Ordinary Shares") of our ADSs could be subject to adverse U.S. federal income tax consequences. These consequences include the following: (i) if our ADSs are "marketable stock" for purposes of the PFIC rules and a U.S. holder makes a mark-to-market election with respect to its ADSs, the U.S. holder will be required to include annually in its U.S. federal taxable income an amount reflecting any year-end increase in the value of its ADSs; (ii) if a U.S. holder does not make a mark-to-market election, it may incur significant additional U.S. federal income taxes on income resulting from distributions on, or any gain from the disposition of, our ADSs, as such income generally would be allocated over the U.S. holder's holding period for its ADSs and subject to tax at the highest U.S. federal income taxation rate in effect for such years, with an interest charge then imposed on the resulting taxes in respect of such income; and (iii) dividends paid by us would not be eligible for reduced individual rates of U.S. federal income tax. In addition, U.S. holders that own an interest in a PFIC are required to file additional U.S. federal tax information returns. A U.S. holder may in certain circumstances mitigate adverse tax consequences of the PFIC rules by filing an election to treat the PFIC as a qualified electing fund, or a QEF. However, in the event that we are or become a PFIC, we do not intend to comply with the reporting requirements necessary to permit U.S. holders to elect to treat us as a QEF. See “Taxation — U.S. Taxation of ADSs and Ordinary Shares - Additional U.S. Federal Income Tax Consequences — PFIC Rules.”

 

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We expect to be treated as a publicly traded corporation for purposes of the PFIC rules with respect to the current taxable year. In such case, the value of our assets for purposes of the asset test will generally be determined by reference to the market price of our shares. Fluctuations in the market price of our shares may cause us to become a PFIC for the current taxable year or later taxable years. In addition, the composition of our income and assets will be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. If we were unable to deploy significant amounts of cash for active purposes, our risk of being classified as a PFIC would substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year. We urge U.S. holders to consult their own tax advisors regarding the possible application of the PFIC rules. See “Taxation — U.S. Taxation of ADSs and Ordinary Shares - Additional U.S. Federal Income Tax Consequences — PFIC Rules.”

 

Exchange rate fluctuations may reduce the amount of U.S. dollars you receive in respect of any dividends or other distributions we may pay in the future in connection with your ADSs.

 

Under German law, the determination of whether we have been sufficiently profitable to pay dividends is made on the basis of our unconsolidated annual financial statements prepared under the German Commercial Code in accordance with accounting principles generally accepted in Germany. Exchange rate fluctuations may affect the amount in U.S. dollars that our shareholders receive upon the payment of cash dividends or other distributions we declare and pay in euros, if any. Such fluctuations could adversely affect the value of our ADSs and, in turn, the U.S. dollar proceeds that holders receive from the sale of our ADSs.

 

As a holder of ADSs, you may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

 

Except as described in this prospectus and the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the ordinary shares evidenced by our ADSs on an individual basis. Under the terms of the deposit agreement, holders of the ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the ordinary shares represented by the ADSs. Pursuant to the deposit agreement and in light of the fact that pursuant to German law and our articles of association, one whole ordinary share represents one vote, voting instructions can be given only in respect of a number of ADSs representing a whole number of ordinary shares. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.

 

The value of the ADSs may not track the price of our ordinary shares.

 

Our ordinary shares currently trade on the Frankfurt Stock Exchange under the Symbol B8F; International Securities Identification Number (ISIN) DE0006046113; German securities code (WKN) 604611. Active trading volume and pricing for our ordinary shares on the Frankfurt Stock Exchange will usually, but not necessarily, act as predictors of similar characteristics in respect of the ADSs. In addition, the terms and conditions of our agreement with our depositary may result in less liquidity or lower market value of the ADS than for our ordinary shares. Since the holders of the ADSs may surrender the ADSs to take delivery of and trade our ordinary shares (a characteristic that allows investors in ADSs to take advantage of price differentials between different markets), an illiquid market for our ordinary shares may result in an illiquid market for the ADSs. Therefore, the trading price of our ordinary shares may not be correlated with the price of the ADSs.

 

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Your right as a holder of ADSs to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

 

We may, from time to time, distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make any such rights available to the ADS holders in the U.S. unless we register such rights and the securities to which such rights relate under the Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary bank will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

 

As a holder of ADSs, you may not receive distributions on our ordinary shares represented by the ADSs or any value for them if it is illegal or impractical to make them available to holders of ADSs.

 

Under the terms of the deposit agreement, the depositary for the ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, in accordance with the limitations set forth in the deposit agreement, it may be unlawful or impractical to make a distribution available to holders of ADSs. We have no obligation to take any other action to permit the distribution of the ADSs, ordinary shares, rights or anything else to holders of the ADSs. This means that, as a holder of ADSs, you may not receive the distributions we make on our ordinary shares or any value from them if it is unlawful or impractical to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.

 

Exchange rate fluctuations may reduce the amount of U.S. dollars you receive in respect of any dividends or other distributions we may pay in the future in connection with your ADSs.

 

Under German law, the determination of whether we have been sufficiently profitable to pay dividends is made on the basis of our unconsolidated annual financial statements prepared under the German Commercial Code in accordance with accounting principles generally accepted in Germany. Exchange rate fluctuations may affect the amount in U.S. dollars that our shareholders receive upon the payment of cash dividends or other distributions we declare and pay in euros, if any. Such fluctuations could adversely affect the value of our ADSs and, in turn, the U.S. dollar proceeds that holders receive from the sale of our ADSs.

 

You may be subject to limitations on the transfer of your ADSs.

 

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems doing so expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks that it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason in accordance with the terms of the deposit agreement. As a result, you may be unable to transfer your ADSs when you wish.

 

U.S. investors may have difficulty enforcing civil liabilities against our company or members of our supervisory and management boards and the experts named in this prospectus.

 

Certain members of our supervisory and management boards and the experts named in this prospectus are non-residents of the U.S., and all or a substantial portion of the assets of such persons are located outside the U.S. As a result, it may not be possible, or may be very difficult, to serve process on such persons or us in the U.S. or to enforce judgments obtained in U.S. courts against them or us based on civil liability provisions of the securities laws of the U.S. In addition, awards of punitive damages in actions brought in the U.S. or elsewhere may be unenforceable in Germany. An award for monetary damages under the U.S. securities laws would be considered punitive if it does not seek to compensate the claimant for loss or damage suffered and is intended to punish the defendant. The enforceability of any judgment in Germany will depend on the particular facts of the case as well as the laws and treaties in effect at the time. Litigation in Germany is also subject to rules of procedure that differ from the U.S. rules, including with respect to the taking and admissibility of evidence, the conduct of the proceedings and the allocation of costs. Proceedings in Germany would have to be conducted in the German language, and all documents submitted to the court would, in principle, have to be translated into German. For these reasons, it may be difficult for a U.S. investor to bring an original action in a German court predicated upon the civil liability provisions of the U.S. federal securities laws against us, certain members of our supervisory and management boards and the experts named in this prospectus. The U.S. and Germany do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters, though recognition and enforcement of foreign judgments in Germany is possible in accordance with applicable German laws.

 

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We will incur significant increased costs as a result of operating as a company whose ADSs are publicly traded in the U.S. and whose ordinary shares are publicly traded on the Frankfurt Stock Exchange, and our management will continue to be required to devote substantial time to new compliance initiatives.

 

As a company whose ADSs will be trading on the The NASDAQ Capital Market in the U.S. and whose ordinary shares will be trading on the Frankfurt Stock Exchange in Germany, we will incur significant legal, accounting, insurance and other expenses that we did not previously incur. In addition, the Sarbanes-Oxley Act, the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules implemented by the SEC and The NASDAQ Capital Market have imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls. These costs will increase at the time we are no longer an emerging growth company eligible to rely on exemptions under the JOBS Act from certain disclosure and governance requirements. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. These laws and regulations could also make it more difficult and expensive for us to attract and retain qualified persons to serve on our supervisory board or its committees or on our management board. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of the ADSs, fines, sanctions and other regulatory action and potentially civil litigation.

 

As a result of becoming a public company in the U.S., we will become subject to additional regulatory compliance requirements, including Section 404 of the Sarbanes-Oxley Act, and if we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

 

As a public company listed on The NASDAQ Capital Market, the Sarbanes-Oxley Act will require, among other things that we assess the effectiveness of our internal control over financial reporting at the end of each fiscal year. We anticipate being first required to issue management's assessment of internal control over financial reporting pursuant to Section 404(a) of the Sarbanes-Oxley Act in connection with issuing our consolidated financial statements as of and for the fiscal year ending December 31, 2018.

 

We have started the process of designing, implementing and testing our internal control over financial reporting required to comply with Section 404(a) of the Sarbanes-Oxley Act. This process is time-consuming, costly and complicated. Our management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that will be applicable to us as a public company listed on The NASDAQ Capital Market. If we fail to maintain internal control over financial reporting adequate to meet the demands that will be placed upon us as a public company listed in the U.S., our business and reputation may be harmed, the accuracy and timeliness of our financial reporting may be adversely affected, and the price of our ADSs may decline.

 

In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal controls over financial reporting beginning with our annual report following the date on which we are no longer an "emerging growth company," which may be up to five fiscal years following the date of this offering.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, regulatory process, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “believe”, “anticipate”, “intend”, “expect”, “target”, “goal”, “estimate”, “plan”, “assume”, “may”, “will”, “predict”, “project”, “would”, “could” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

 

The forward-looking statements in this prospectus include, but are not limited to, statements about:

 

·our ability to achieve and sustain profitability;
·our ability to compete effectively in selling our products;
·our ability to expand, manage and maintain our direct sales and marketing organizations;
·our actual financial results may vary significantly from forecasts and from period to period;
·our estimates regarding anticipated operating losses, future revenues, capital requirements and our needs for additional financing;
·our ability to market, commercialize, achieve market acceptance for and sell our products and product candidates;
·market risks regarding consolidation in the healthcare industry;
·the willingness of healthcare providers to purchase our products if coverage, reimbursement and pricing from third party payors for procedures using our products significantly declines;
·our ability to adequately protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
·the regulatory and legal risks, and certain operating risks, that our international operations subject us to;
·the fact that product quality issues or product defects may harm our business;
·any product liability claims; and
·the progress, timing and completion of our research, development and preclinical studies and clinical trials for our products and product candidates.

 

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly the factors described in the “Risk Factors” section of this prospectus, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

 

You should read this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about us, including those listed in the sections of this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus.

 

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We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

EXCHANGE RATES

 

The following table shows, for the years and dates indicated, certain information concerning the rate of exchange of euro per U.S. dollar based on the Noon Buying Rates quoted by the Federal Reserve Bank of New York for euros expressed in U.S. dollars for one Euro. No representation is made that the euro or the U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or euros, as the case may be, at any particular rate.

 

    U.S. dollar for one Euro
Period   High   Low   Period
Average(1)
  Period
End
Nine month ended September 30, 2017     1.2041       1.0416       1.1242       1.1813  
Six months ended June 30, 2017     1.1420       1.0416       1.0924       1.1411  
2016     1.1516       1.0375       1.1072       1.0552  
2015     1.2015       1.0524       1.1096       1.0859  
2014     1.3927       1.2101       1.3297       1.2101  
2013     1.3816       1.2774       1.3779       1.3281  
2012     1.3463       1.2062       1.2859       1.3186  

 

 

(1) The average of the Noon Buying Rates on the last business day of each full month during the relevant period.

 

The high and low exchange rates for the euro for each month during the previous 11 months is set forth below:

 

   U.S. dollar for one Euro
Month  High  Low
January 2017   1.0794    1.0416 
February 2017   1.0802    1.0551 
March 2017   1.0882    1.0514 
April 2017   1.0941    1.0606 
May 2017   1.1236    1.0869 
June 2017   1.1420    1.1124 
July 2017   1.1826    1.1336 
August 2017   1.2025    1.1703 
September 2017   1.2041    1.1747 
October 2017   1.1847    1.1580 
November 2017    1.1936    1.1577 

 

The Noon Buying Rate for the euro on [         ] was quoted by the Federal Reserve Bank of New York at [          ] U.S. dollars for one euro.

 

 55 

 

 

USE OF PROCEEDS

 

We estimate that the net proceeds to us from this offering will be approximately $[      ], or $[      ] million if the underwriters’ over-allotment option is exercised in full, after deducting underwriting discounts and commissions of approximately $[      ], or approximately $[      ] if the underwriters’ over-allotment option is exercised in full, and estimated offering expenses payable by us, of approximately $[      ] (based on an assumed offering price of $[       ] per ADS, which is based on the closing market price for our ordinary shares on the XETRA electronic trading platform of the Frankfurt Stock Exchange for the shares on [      ] and an assumed exchange rate of $[      ]/€1.00), and assuming, in each case, completion of the temporary share loan arrangement in connection with and issuance of new shares related to this offering as described in “Related Party Transactions — Share Loan Agreement”.

 

We intend to use approximately $[      ] of the net proceeds from this offering to increase our marketing and sales organization in the U.S. We also intend to use approximately $[      ] of the net proceeds of the offering to continue to fund the following clinical trials of Ameluz® (and to make regulatory filings for marketing approval of Ameluz®, both for geographic expansion and the extension of the indications for Ameluz®): (i) our clinical trial comparing the efficacy of Ameluz® PDT with PDT using just the vehicle that is used to deliver the active ingredient in Ameluz®, in combination with photodynamic therapy when using our BF-RhodoLED® lamp, in the treatment of superficial basal cell carcinoma, (ii) our clinical trial investigating the field-directed treatment of actinic keratosis on the extremities and the trunk with Ameluz®, (iii) our clinical trial evaluating the safety and efficacy of Ameluz® versus placebo in the treatment of Bowen’s disease (squamous cell carcinoma in situ) with photodynamic therapy when using our BF-RhodoLED® lamp and (iv) our clinical trial evaluating the safety and efficacy of Ameluz® at an application thickness of 1 mm versus application of a thin layer of Ameluz® in the treatment of mild to severe actinic keratosis on the face and/or scalp with photodynamic therapy when using our BF-RhodoLED® lamp. We expect to be able to complete all of these clinical trials and the related regulatory filings and marketing approval processes with the proceeds from this offering and our other available sources of liquidity. We will use the remainder of the net proceeds, if any, for general corporate purposes.

 

The amounts and timing of our actual expenditures will depend on numerous factors, the timing and success of any clinical trials and preclinical studies we may commence in the future, the timing of regulatory submissions, the status of our sales and marketing efforts, the amounts of proceeds actually raised in this offering and the amount of cash generated by our operations. Because we operate in a very dynamic and highly competitive industry, the actual use of proceeds may differ substantially from the ranges indicated above. Our management will have broad discretion to allocate the net proceeds from this offering.

 

Pending our use of the net proceeds, we intend to invest them in short-term and medium-term interest-bearing instruments.

  

 56 

 

 

DIVIDEND POLICY AND LIQUIDATION PROCEEDS

 

We have never declared or paid any dividends on our ordinary registered shares. Under German corporate law, we currently have no ability to pay dividends because of our past losses. If we were to earn annual net income, we currently plan to retain such annual net income for the foreseeable future to finance business development and internal growth. In addition and our EIB credit facility generally restrict the payment of dividends by us. We, therefore, do not anticipate paying dividends in the foreseeable future.

 

Under German law, Biofrontera may pay dividends only from retained earnings (Bilanzgewinn) reflected in its unconsolidated financial statements (as opposed to the consolidated financial statements for Biofrontera and its subsidiaries) prepared in accordance with the principles set forth in the German Commercial Code (Handelsgesetzbuch) and as adopted and approved by the management board (Vorstand) and the supervisory board (Aufsichtsrat). In determining the retained earnings that may be distributed as dividends, under our articles of association, the management board and the supervisory board may allocate to earnings reserves (Gewinnrücklagen) our remaining net income (Jahresüberschuss) for the fiscal year after deducting amounts to be allocated to legal and statutory reserves and losses carry forward in whole or in part. An amount of more than half of the remaining net income may only be allocated to earnings reserves, if the earnings reserves after allocation would exceed half of the registered capital.

 

Our shareholders, in their resolution on the appropriation of retained earnings, may carry forward distributable retained earnings in part or in full and may allocate additional amounts to earnings reserves. Profits carried forward will be automatically incorporated in the retained earnings of the next fiscal year. Amounts allocated to the earnings reserves are available for dividends only if and to the extent the earnings reserves have been dissolved by the management board when preparing the financial statements, thereby increasing the retained earnings.

 

Our shareholders may declare dividends at an ordinary general shareholders’ meeting, which must be held within the first eight months of each fiscal year. Dividends approved at an ordinary general shareholders’ meeting are payable promptly after the meeting, unless otherwise decided at the meeting. Because all of our shares are in book-entry form represented by one or more global certificates deposited with Clearstream Banking AG in Frankfurt am Main, Germany, shareholders receive dividends through Clearstream Frankfurt for credit to their deposit accounts.

 

Apart from liquidation as a result of insolvency proceedings, Biofrontera may be liquidated (liquidiert) only with a majority of three-quarters of the share capital present or represented at a shareholders’ meeting at which the vote is taken. In accordance with the German Stock Corporation Act (Aktiengesetz), upon a liquidation of Biofrontera, any liquidation proceeds remaining after paying off all of our liabilities would be distributed among the shareholders in proportion to the number of ordinary shares held by each shareholder.

 

Dividends are subject to German withholding tax. See “German Taxation of ADSs — Withholding Tax Refund for U.S. Treaty Beneficiaries”.

 

 57 

 

 

TRADING MARKETS

 

Our shares are currently traded on the Frankfurt Stock Exchange under the symbol “B8F”.

 

Prior to the offering, there has been no public market in the U.S. for our shares or the ADSs. We have applied for the quotation of the ADSs on The NASDAQ Capital Market under the symbol “BFRA”.

 

The table below sets forth for the periods indicated the high and low closing prices in euro of our shares as reported by the XETRA electronic trading platform of the Frankfurt Stock Exchange:

 

   High (€)  Low (€)
       
2012:          
First quarter   4.22    2.85 
Second quarter   5.16    3.45 
Third quarter   4.25    2.95 
Fourth quarter   4.14    3.69 
2013:          
First quarter   4.95    3.75 
Second quarter   4.90    3.27 
Third quarter   4.00    3.25 
First quarter   3.65    3.29 
2014:          
First quarter   4.08    3.20 
Second quarter   3.35    2.80 
Third quarter   2.86    2.18 
Fourth quarter   3.00    2.29 
           
2015:          
First quarter   2.69    1.84 
Second quarter   2.70    2.04 
Third quarter   2.30    2.00 
Fourth quarter   2.30    1.60 
           
2016:          
First quarter   2.26    1.85 
Second quarter   3.69    2.29 
Third quarter   3.21    2.61 
Fourth quarter   3.41    2.88 
           
Previous six months:          
June 2017   4.34    3.58 
July 2017   3.88    3.65 
August 2017   4.06    3.73 
September 2017   3.96    3.51 
October 2017   3.69    3.53 
November 2017   3.94    3.16 

 

The average daily volume of our shares traded on the XETRA electronic trading platform of the Frankfurt Stock Exchange for the years 2016, 2015, and 2014 was 50,987, 37,960 and 17,898, respectively. In the first nine months of 2017, the average daily volume of our shares traded on XETRA was 54,888.

 

On [      ], 2017, the closing price of our shares on the Frankfurt Stock Exchange was €[      ].

 

We were also listed on the AIM Market of the London Stock Exchange from June 3, 2014 until February 18, 2015. Trading and liquidity however on that stock exchange was very limited and, as a result, we informed the London Stock Exchange of our intent to terminate such listing, which was effectuated on February 18, 2015.

 

 58 

 

  

CAPITALIZATION

 

The following table sets forth our capitalization and cash and cash equivalents, debt and total capitalization of our company as of [ ], 2017:

 

·on an actual basis in accordance with IFRS;

 

·

on an adjusted basis, to give effect to the issuance of [____] ordinary shares in the combined offering consisting of this offering of ADSs and the German preemptive rights offering, at an assumed offering price of €[___] per share (based on the closing market price of our ordinary shares on the XETRA electronic trading platform of the Frankfurt Stock Exchange on [_____]) and $[_____] per ADS (based on an assumed exchange rate of €[___] per 1.00 U.S. dollar, which was the exchange rate of such currencies as of [____], 2017), and after deducting underwriting discounts and commissions and estimated offering expenses of approximately $[___] payable by us.

 

  As of [     ], 2017
    Actual   As adjusted(1)(3)  
(amounts in thousands,
except per share data)
  $(4)     $(4)    
Cash and cash equivalents     [___]       [___]       [___]       [___]    
Debt                                  
Long-term debt, net of current portion     [___]       [___]       [___]       [___]    
Capital lease obligations, net of current portion     [___]       [___]       [___]       [___]    
Total debt, net of current portion     [      ]       [      ]       [      ]       [      ]    
Total debt, including current portion     [      ]       [      ]       [      ]       [      ]    
Shareholders’ Equity                                  
Ordinary shares, with no par value (notional par value of €1 per share), ([______] shares issued and outstanding at [___], 2017; [______] shares issued and outstanding as adjusted for this offering of [______] shares)(2)     [___]       [___]       [___]       [___]    
Additional paid-in capital     [___]       [___]       [___]       [___]    
Subscribed shares     [___]       [___]       [___]       [___]    
Accumulated other comprehensive loss     [___]       [___]       [___]       [___]    
Accumulated deficit     [___]       [___]       [___]       [___]    
Total equity     [___]       [___]       [___]       [___]    
Total capitalization     [      ]       [      ]       [      ]       [      ]    

 

 59 

 

 

(1) Each €[____] increase or decrease in the assumed public offering price of €[___] per share ($[____] per ADS), the closing market price of our ordinary shares on the XETRA electronic trading platform of the Frankfurt Stock Exchange on [____], would increase or decrease, respectively, the amount of cash and cash equivalents, total equity and total capitalization by €[____] ($[_____]), assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of ADSs we are offering. An increase or decrease of [_________] ADSs we are offering would increase or decrease, respectively, the amount of cash and cash equivalents, total equity and total capitalization by $[____] (€[____]), assuming the assumed public offering price per ADS, as set forth on the cover page of this prospectus, remains the same. The as adjusted information is illustrative only, and we will adjust this information based on the actual public offering price and other terms of this offering determined at pricing.
(2) The actual number of ordinary shares shown as issued and outstanding excludes [_____] ordinary shares issuable upon the exercise of convertible bonds outstanding as of [____], 2017, with conversion prices ranging from €[____] to €[____].
(3) Assumes completion of the temporary share loan arrangement in connection with the issuance of new shares related to this offering. See “Related Party Transactions — Share Loan Agreement.”
(4) Translated solely for convenience into U.S. dollars at an assumed exchange rate of €[____] per 1.00 U.S. dollar, which was the exchange rate of such currencies as of [____], 2017.

 

 60 

 

  

DILUTION

 

If you invest in our ADSs in this offering, your interest will be immediately diluted to the extent of the difference between the initial public offering price per ADS in this offering and the net tangible book value per ADS after the combined offering consisting of this offering of ADSs and the German preemptive rights offering. Dilution results from the fact that the initial public offering price per ADS is substantially in excess of the net tangible book value per ADS. As of June 30, 2017, we had a historical net tangible book value per ADS of $[_____] (€[_____]), or €[_____] per share ($[_____]). Our net tangible book value per share represents total consolidated tangible assets less total consolidated liabilities, all divided by the number of shares outstanding on June 30, 2017.

 

After giving effect to:

 

(i)

the sale of [___] ordinary shares in the combined offering consisting of this offering of ADSs and the German preemptive rights offering at an assumed offering price of €[___] per share (based on the closing market price of our ordinary shares on the XETRA electronic trading platform of the Frankfurt Stock Exchange on [_____]) and $[___] per ADS (based on an assumed exchange rate of €[___] per 1.00 U.S. dollar, which was the exchange rate of such currencies as of [___], 2017), and after deducting the underwriting discounts and commissions and estimated offering expenses, and assuming completion of the temporary share loan arrangement in connection with the issuance of new shares related to this offering as described in “Related Party Transactions — Share Loan Agreement”, and

(ii) further assuming the underwriters have not exercised their over-allotment option,

 

Our as adjusted net tangible book value at June 30, 2017, would have been €[_____] per share, or $[_____] per ADS. This represents an immediate increase in as adjusted net tangible book value of €[_____] ($[_____]) per share to existing shareholders and an immediate dilution of $[_____] per ADS to new investors. The following table illustrates this dilution per ADS:

 

Assumed initial public offering price per ADS   $    
Historical net tangible book value per ADS as of June 30, 2017(1)(2)   $    
Increase in pro forma net tangible book value per ADS attributable to new investors in the combined offering(1)(3)    $    
Pro forma net tangible book value per ADS after the combined offering(1)(3)   $    
Dilution per ADS to new investors participating in the U.S. offering(3)   $    

 

 

(1) Translated solely for convenience into U.S. dollars at an exchange rate of € [ ] per 1.00 U.S. dollar, which was the exchange rate of such currencies as of June 30, 2017.
(2) Based on the historic net tangible book value per share as of such date.
(3) Assumes completion of the temporary share loan arrangement in connection with the issuance of new shares related to this offering. See “Related Party Transactions — Share Loan Agreement.”

 

A €[      ] increase or decrease in the assumed public offering price of €[___] per share ($[____] per ADS), the closing market price of our ordinary shares on the XETRA electronic trading platform of the Frankfurt Stock Exchange on [       ], would increase or decrease, respectively, our as adjusted net tangible book value as of June 30, 2017, after this offering by approximately €[____] per share ($[____]), or $[____] per ADS (€[___]), and would increase or decrease, respectively, dilution to investors in this offering by $[ ] per ADS (€[ ]), assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of ADSs we are offering. An increase or decrease of [__________] ADSs we are offering would increase or decrease, respectively our pro forma net tangible book value as of June 30, 2016 after this offering by €[_____] per share ($[_____]), or $[_____] per ADS (€[_____]), and would decrease or increase, respectively, dilution to investors in this offering by approximately $[_____] per ADS (€[_____]), assuming the assumed public offering price per ADS remains the same, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The as adjusted information is illustrative only, and we will adjust this information based on the actual public offering price and other terms of this offering determined at pricing. If the underwriters fully exercise their option to purchase additional ADSs, as adjusted net tangible book value after this offering would increase to approximately $[_____] per ADS (€[_____]), and there would be an immediate dilution of approximately $[_____] per ADS (€[_____]) to new investors.

 

 61 

 

 

We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our equity holders.

 

The following table shows, as of June 30, 2017, on an as adjusted basis and assuming completion of the temporary share loan arrangement in connection with the issuance of new shares related to this offering as described in “Related Party Transactions — Share Loan Agreement”, the number of ADSs purchased from us, the total consideration paid to us and the average price paid per share by existing shareholders and by new investors purchasing ADSs in the U.S. offering and ordinary shares in the German preemptive rights offering:

 

   Shares or Share
Equivalents(1)
Subscribed For/
Purchased
   Total Consideration   Average
Price Per
Share
or Share
 
   Number   Percent   Amount   Percent   Equivalents 
Existing shareholders       %  $    %  $ 
Investors participating in the U.S. offering
and German preemptive rights offering(2)
         %  $      %  $  
Total         %  $      %  $  

 

 

(1)Each ADS represents [two] ordinary shares.
(2)

Assumes (i) a public offering price of €[___] per share (based on the closing market price of our ordinary shares on the XETRA electronic trading platform of the Frankfurt Stock Exchange on [____]) and $[___] per ADS (based on an assumed exchange rate of €[___] per 1.00 U.S. dollar, which was the exchange rate of such currencies as of [____], 2017), before deducting the underwriting discounts and commissions and estimated offering expenses payable by us (in thousands, except share and per share amounts and percentages).

 

The number of shares and ADSs to be outstanding after this offering is based on the number of shares outstanding as of June 30, 2017, and excludes up to [__________] shares that may be issued upon the conversion of outstanding convertible bonds, and assumes (i) no exercise of the underwriters’ over-allotment option to purchase up to [__________] additional ADSs, and (ii) completion of the temporary share loan arrangement in connection with the issuance of new shares related to this offering as described in “Related Party Transactions — Share Loan Agreement”.

 

 62 

 

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

The following table sets forth a summary of the consolidated historical financial information of, and for the periods ended on, the dates indicated for Biofrontera AG. We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. The selected consolidated statement of operations data for the years ended December 31, 2016 and December 31, 2015, and the selected consolidated balance sheet data as of December 31, 2016 and December 31, 2015 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our selected consolidated statement of operations data for the six months ended June 30, 2017 and June 30, 2016 and the selected consolidated balance sheet data as of June 30, 2017 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all normal recurring adjustments that we consider necessary for a fair statement of our financial position and operating results for the periods presented.

 

You should read the following summary of consolidated financial information in conjunction with the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes contained elsewhere in this prospectus.

 

  

Six Months Ended

June 30,

  

 

Year Ended December 31,

 
   2017   2016   2016   2015 
             
   (amounts in thousands, except share and per share data) 
Statement of operations data:                
Sales Revenue   5,006    1,709    6,130    4,138 
Gross Margin   87,31%   55.30%   73.05%   70.14%
Research and development costs   (2,185)   (1,852)   (4,640)   (6,204)
Sales costs   (8,275)   (2,832)   (8,763)   (4,170)
General administrative costs   (1,696)   (1,372)   (2,853)   (2,759)
Loss from operations   (7,785)   (5,112)   (11,779)   (10,231)
Loss before income tax   (8,736)   (3,472)   (10,579)   (11,203)
Per share data:                    
Basic and diluted loss per share   (0.23)   (0.12)   (0.36)   (0.48)
Basic and diluted operating loss per share   (0.23)   (0.12)   (0.38)   (0.48)
Shares used in computing basic and diluted loss per share   38,416,428    29,194,771    29,742,634    23,156,343 

 

  

Six Months Ended

June 30,

  

 

At December 31,

 
   2017   2016   2015 
          
   (amounts in thousands) 
Balance sheet data:               
Cash and cash equivalents   11,452    15,126    3,959 
Other current financial assets   2,338    3,001    1,625 
Other current assets   3,912    3,855    1,639 
Non-current Assets   1,647    1,897    2,275 
Total assets   19,348    23,879    9,498 
Long-term liabilities   2,654    3,597    11,230 
Current liabilities   6,305    4,440    3,077 
Total shareholders‘ equity   10,389    15,842    (4,809)

 

  

Six Months Ended

June 30,

  

 

Year Ended December 31,

 
   2017   2016   2016   2015 
             
   (amounts in thousands) 
Other financial data:                    
Net cash flow from operational activities   (8,087)   (2,511)   (10,259)   (9,655)
Net cash flow from (into) investment activities   (192)   (143)   (455)   17 
Net cash flows from financing activities   4,605    8,867    21,881    5,088 

 

 63 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with the audited consolidated financial statements and the notes to our financial statements included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. As a result of many factors, including those set forth under the section entitled “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in the forward-looking statements contained in the following discussion and analysis.

 

Overview

 

We are an international biopharmaceutical company specializing in the development and commercialization of a platform of pharmaceutical products for the treatment of dermatological conditions and diseases caused primarily by exposure to sunlight that results in sun damage to the skin.

 

We were founded in 1997 by Professor Hermann Lübbert, Ph.D., who currently serves as chairman of our management board and our chief executive officer. Our ordinary shares have been listed on the Stock Exchange in Düsseldorf since 2006 and on the Frankfurt Stock Exchange since 2012 under the ticker symbol “B8F” since 2012.

 

Our principal product is Ameluz®, which is a prescription drug approved for use in combination with photodynamic therapy, or PDT, which we sometimes refer to as Ameluz® PDT. We are currently selling Ameluz® in the U.S., in 11 countries in Europe and in Israel. In Germany, Spain, the UK, and the U.S., we distribute and sell our products through our own sales force. We have agreements with partners to sell Ameluz® and the BF-RhodoLED® lamp in other European countries and in Israel. We manufacture Ameluz® for worldwide sales using a third party contract manufacturer in Switzerland. We manufacture our BF-RhodoLED® lamp at our corporate headquarters in Leverkusen, Germany.

 

Ameluz® PDT received centralized European approval in 2011 from the European Commission for the treatment of actinic keratosis of mild to moderate severity on the face and scalp. Since the initial centralized European approval of Ameluz® PDT, the European Commission granted label extensions for the use of Ameluz® PDT for (i) the treatment of field cancerization, or larger areas of skin on the face and scalp with multiple actinic keratoses and (ii) the treatment of superficial and/or nodular basal cell carcinoma unsuitable for surgical treatment due to possible treatment-related morbidity and/or poor cosmetic outcome.

 

In addition, we have developed our own PDT lamp, BF-RhodoLED®, for use in combination with Ameluz®. Our BF-RhodoLED® lamp was approved as a medical device in the EU in November 2012 and is approved for sale in all EU countries, although the use of our BF-RhodoLED® lamp is not required to be used in combination with Ameluz® in the EU or Switzerland.

 

In May 2016, we received approval from the FDA to market in the U.S. Ameluz® in combination with photodynamic therapy using our BF-RhodoLED® lamp for lesion-directed and field-directed treatment of actinic keratoses of mild-to-moderate severity on the face and scalp. We launched the commercialization of Ameluz® and BF-RhodoLED® for actinic keratosis in the U.S. in October 2016.

 

We are also seeking to extend the approved indications in the EU for Ameluz® to include treatment for actinic keratosis with Ameluz® in combination with daylight photodynamic therapy (i.e., using natural daylight to activate the drug), which we applied for in the second quarter of 2017.

 

We intend to further develop and seek approval to commercialize Ameluz® for the treatment of other medical conditions, such as basal cell carcinoma in the U.S. and squamous cell carcinoma in situ. See “Business—Recent Achievements” for a summary of recent developments in connection with out efforts to extend the approved indications for Ameluz®.

 

 64 

 

 

In our product pipeline, we are pursuing research and development of up to four branded generic dermatology drugs under a collaboration and partnership agreement with Maruho, a pharmaceutical company based in Japan specializing in dermatology that is also an affiliate of Maruho Deutschland GmbH, a major shareholder of our company. See “Business — Our Research and Development Plans — Our Development Collaboration with Maruho” for more information.

 

We have incurred losses in each year since inception. Our net loss for the fiscal years ended December 31, 2015 and December 31, 2016 was €11.2 million and €10.6 million, respectively. As of September 30, 2017, we had an accumulated deficit of €135.0 million. Our ability to become profitable depends on our ability to further commercialize Ameluz®. Even if we are successful in increasing our product sales, we may never achieve or sustain profitability. We anticipate substantially increasing our sales and marketing expense as we attempt to exploit the recent regulatory approvals we have received to market Ameluz® in the U.S. and the EU. There can be no assurance that our sales and marketing efforts will generate sufficient sales to allow us to become profitable. Moreover, due to the numerous risks and uncertainties associated with developing and commercializing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if ever.

 

Over the past five years, we have funded our operations primarily through the issuance and sale of equity securities, warrant bonds and convertible bonds. We expect to continue to fund our operations over the next several years primarily through proceeds from the EIB credit facility that we entered into in May 2017, our existing cash resources, and revenues generated from our operating business. If we achieve certain milestones, we may borrow additional amounts under the EIB credit facility and may also, subject to the covenants under our existing debt obligations, enter into other forms of debt financing. Any equity financing, if needed, would likely result in dilution to our existing shareholders and any debt financing, if available, would likely involve significant cash payment obligations and include restrictive covenants that may restrict our ability to operate our business.

 

Components of Our Results of Operations

 

Revenue

 

We generate revenue through the sale of our products Ameluz®, BF-RhodoLED® and Belixos® (our cosmetic skin care product) as well as from payments made by Maruho to us in connection with the development projects we conduct under our collaboration and partnership agreement with it.

 

In Germany, Spain, the UK and the U.S., we distribute and sell Ameluz® through our own sales force and recognize revenue upon shipment to our customers, such as wholesalers or hospitals or physicians. We have entered into license and distribution agreements with a variety of partners in other European countries and Israel. According to these agreements, we produce our products and sell them to our distribution or commercial partners at a transfer price, which is a defined percentage of the estimated final sales price in the respective country or territory. Such percentages range from 35% to 60%. Since production of Ameluz® is specific for most countries, we typically produce larger lots for our distribution or commercial partners and ship and invoice them. Our distribution or commercial partners hold inventory and subsequently sell stock over time in their applicable country or territory. We recognize revenue upon shipment to such partners. Upon signing of our license and supply agreements, we also typically receive one-time payments from our distribution partners.

 

Accordingly, the primary factors that determine our revenue derived from our products are:

 

the level of orders generated by our sales force in the U.S. and Germany;

 

the level of orders from our commercial partners

 

the level of prescriptions and institutional demand for our products; and

 

unit sales prices.

 

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We also generate revenue from development projects entered into with Maruho. Under a collaboration and partnership agreement we entered into with Maruho, development work for the product candidates will be carried out either by our personnel or by subcontractors that we select. All costs under these projects will be borne by Maruho (subject to a cap of €2.3 million) and invoiced from us to Maruho on a monthly basis. We generated revenue of €1.2 million from this agreement in the fiscal year ended December 31, 2016.

 

Revenue from the sales of our BF-RhodoLED® photodynamic therapy lamp, which we mainly use our lamp to support sales of Ameluz®, and Belixos®, our over-the-counter line of skin care cosmetics products, are relatively insignificant compared with the revenues generated through our sales of Ameluz®.

 

Between 2015 and 2016, revenue in Germany decreased by 17% due to lower volume of sales, while revenue in other countries increased by 20%, driven primarily by prices that were on average 45% higher in 2016 (due to a higher volume of sales in countries with higher prices, in particular Spain). This average price increase was partially offset by a volume decrease of (25)%, although the decrease in volumes occurred primarily in countries where we sell to our license partners (from which we receive lower revenues as a result of the transfer price we must pay to the license partners, which on average is approximately 50% of the local average selling price in the relevant country).

 

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016, revenue in Germany increased by 7%, based on a greater volume of sales, while revenue in other countries increased by 15% driven primarily by (i) a more favorable mix of revenue at higher price points with various license partners and revenue in Spain (where we sell Ameluz® directly, rather than through license partners) and (ii) an increase in volume of 7%.

 

The following table provides a breakdown of revenue for the past two fiscal years and for the six months ended June 30, 2017 and 2016:

 

   Six months
ended June 30,
   Year ended December 31, 
   2017   2016   2016   2015 
             
   (amounts in thousands) 
Germany   1,103    1,034    2,515    3,028 
United States   2,386    0    1,153    0 
Other International revenues   732    635    1,247    1,040 
One time license payments   0    40    40    70 
Development Projects   785    0    1,177    0 
Total Revenue   5,006    1,709    6,132    4,138 

 

Cost of Goods Sold

 

Our cost of goods sold is comprised of all direct manufacturing expenses for our products, including any expenses associated with manufacturing and logistics, such as packaging, freight or transportation costs. We further include any costs associated with changes or upgrades in the manufacturing processes at our third party manufacturers which had to be paid by us to fulfill certain post-approval obligations requested by the EMA. All overhead costs associated with manufacturing are also included in our costs of goods sold.

 

Research and Development Expenses

 

We incur research and development expenses related to our clinical and drug and medical device development programs. Our research and development expenses consist of expenses incurred in developing, testing and manufacturing drugs and devices for clinical trials, as well as seeking and maintaining regulatory approval of our product candidates, including:

 

·expenses associated with regulatory submissions, clinical trials and manufacturing;

 

·payments to third party contract research organizations, or CROs, contract laboratories and independent contractors;

 

·payments made to regulatory consultants;

 

·payments made to third party investigators who perform clinical research on our behalf and clinical sites where such testing is conducted;

 

·personnel related expenses, such as salaries, benefits, travel and other related expenses;

 

·expenses incurred to obtain and maintain regulatory approvals and licenses, patents, trademarks and other intellectual property; and

 

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·facility, maintenance, and allocated rent, utilities, and depreciation and amortization, and other related expenses.

 

Research and development costs totaled €4.6 million and €6.2 million for the fiscal years ended December 31, 2016 and December 31, 2015, respectively. From 2014 through 2016, our research and development costs totaled €15.4 million.

 

The following table summarizes the costs of significant projects and reconciling items to arrive at total research and development expenses for the periods shown (in thousands of euros):

 

   Six months
ended June 30,
   Year ended December 31, 
   2017   2016   2016   2015 
             
   (amounts in thousands) 
Clinical studies (external expenses)   750    613    1,356    1,833 
FDA and EMA fees   404    85    932    2,072 
Other expenses   1,031    1,154    2,352    2,299 
Total Research and development expenses   2,185    1,852    4,640    6,204 

 

As we continue our clinical trial program for Ameluz®, both to show effectiveness in comparison to other drugs or therapies and to try to extend the current indications of Ameluz®, we expect to incur similar levels of research and development expenses. In addition, any termination of, or delays in completing, our clinical trials will slow down our product development and approval process, leading to increased costs.

 

Sales Costs

 

Sales costs consist primarily of salaries, benefits and other related costs for personnel serving in our sales, marketing and business development functions in Germany, Spain and the U.S. Our sales costs also include costs related to marketing materials as well as sales congresses, industry conferences and similar events conducted to promote our products. Sales costs for the fiscal year ended December 31, 2015 also include marketing expenses in the UK incurred by our former marketing partner Spirit Healthcare, which expenses were reimbursed by us until our contract with Spirit Healthcare terminated in July 2015.

 

In 2016, we significantly increased our sales costs with the continued commercialization of our products, in particular, to establish and build, after obtaining FDA approval that year, a marketing and sales organization in the U.S. in connection with the launch of commercial sales in the U.S. of Ameluz® and our BF-RhodoLED® lamp in the U.S. Although our revenue increased significantly in the six months ended June 30, 2017, as compared with the six months ended June 30, 2016, our sales costs increased even more significantly. This increase in sales costs related primarily to the hiring of new sales professionals in the U.S. As our presence becomes more established in the U.S. we plan to leverage our sales professionals and will seek to generate more revenue per person so that revenues related to efforts from these salespersons exceed their cost.

 

We incurred sales costs of €8.8 million and €4.2 million for the fiscal years ended December 31, 2016, and December 31, 2015, respectively.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of compensation for employees in executive and operational functions, including finance, investor relations, information technology and human resources. Other significant costs in this category include facilities costs and professional fees for accounting and legal services, travel, insurance premiums and depreciation. After completion of the offering, we anticipate increases in expenses relating to insurance, legal and accounting services, investor relations and other internal resource requirements arising from additional compliance and reporting obligations imposed by The NASDAQ Capital Market and the U.S. federal securities laws.

 

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We incurred general and administrative expenses of €2.9 million and €2.8 million for the fiscal years ended December 31, 2016, and December 31, 2015, respectively.

 

Stock Compensation

 

We grant stock options to members of our management board, senior management, and employees. We recognize compensation expense as a charge to operations over the relevant vesting period of the options, which generally is four years.

 

The aggregate estimated fair value for options issued during the fiscal year ended December 31, 2016 was approximately €1.5 million, which is being recognized over the vesting periods. Total compensation expense recorded related to options during the fiscal year ended December 31, 2016, was approximately €0.1 million. From inception through the fiscal year ended December 31, 2016, we have incurred cumulative compensation expense related to stock options of approximately €0.5 million.

 

Finance Expense

 

Finance expense consists of interest income and interest expense, and foreign exchange gains (losses). Interest income consists of interest earned on our cash and cash equivalents. The interest expenses were almost entirely the result of interest payments on our two series of warrant bonds outstanding during 2015 and 2016, and of the compounding of interest on those two series of warrant bonds, using the effective interest method. We incurred finance expense of €1.2 million and €1.2 million in the fiscal years ended December 31, 2016 and December 31, 2015, respectively.

 

Other Income and Expenses

 

Other income typically consists of creation and reversal of certain accruals, mainly for bonuses and accrued expenses. In 2016, we also recorded the reimbursement of the application fee we had paid to the FDA in 2015 upon submission of our New Drug Application under the U.S. Prescription Drug User Fee Act, or PDUFA fee, in other income. Payment of that fee was made in 2015 and recorded in research and development expenses.

 

Income Taxes

 

As a result of the net losses we have incurred in each fiscal year since inception, we have recorded no provision for income taxes during such periods. At December 31, 2016, we had net operating loss carry-forwards for German corporation and trade tax purposes of €120.4 million and at December 31, 2015, we had net operating loss carry-forwards for German corporation and trade tax purposes of €109.8 million. Deferred tax assets are generally determined on the basis of the existing income tax rates in Germany. As a result of the German Company Tax Reform Act 2008, the corporation tax rate is set at 15%. When a solidarity surcharge of 5.5% is included, this results in a combined tax rate of 15.8%.

 

In addition to the corporate tax rate, our company is also subject to a local business tax rate of 16.6%. As the business taxes are not deductible as an operating expense, the resulting tax rate is 32.4%.

 

Loss carry forwards have an unlimited carry forward period under current German law.

 

Effect of Foreign Currency Fluctuations

 

We publish our consolidated financial statements in euros. Historically, most of our revenues and expenses have also been denominated in euros. Therefore, we have not been subject to any major influences on our net income due to currency exchange effects. Since we have obtained FDA approval and begun to commercialize our products in the U.S., we expect to generate a significant part of our revenues and expenses in U.S. dollars. These revenues and expenses incurred in U.S. dollars will be translated into euros when they are reported in our consolidated financial statements. As a result, any substantial future appreciation or decline of the U.S. dollar against the euro could have a material effect on our revenue and profitability.

 

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Our product, Ameluz®, is manufactured by a third party contract manufacturer in Switzerland. Any invoices by such manufacturer are denominated in Swiss Francs. As our sales and revenue increase, we expect to increase the manufacturing purchases from our Swiss manufacturer and could, therefore, be increasingly subject to currency exchange effects from these Swiss Franc denominated transactions with our Swiss manufacturer.

 

Results of Operations

 

Comparison of the six months ended June 30, 2017 to the six months ended June 30, 2016

 

Total revenue

 

Total Revenue
   Six months ended
June 30,
   Increase (decrease) 
   2017   2016   Amount   Percentage 
   € thousands (except percentages) 
Germany   1,103    1,034    69    7%
United States   2,386    0    2,386    n/a 
Other International Revenues   732    635    97    15%
One Time License Payments   0    40    (40)   (100)%
Maruho Development Project   785    0    785    n/a 
Total Revenue   5,006    1,709    3,297    193%

 

Revenue for the six months ended June 30, 2017 increased by approximately 193% to €5.0 million from €1.7 million for the six months ended June 30, 2016. This increase was mainly driven by revenue in the U.S. (€2.4 million) and revenue from the Maruho development project (€0.8 million).

 

During the six months ended June 30, 2017, we recorded €1.1 million of revenue in Germany, which represents an increase of €69 thousand or 7% compared to the six months ended June 30, 2016.

 

During the six months ended June 30, 2017, we recorded revenue of €0.7 million from the sale of products in other European countries, either to our distribution partners or from our own sales in countries other than Germany. This represents an increase of €97 thousand or 15%.

 

During the six months ended June 30, 2017, we further recorded €2.4 million revenue in the U.S. During the six months ended June 30, 2016, we had no revenues from the sale of products in the U.S. We commenced commercialization of Ameluz® in the U.S. in October 2016, so the six months ended June 30, 2017 represented the full first half-year period during which we have marketed Ameluz® in the U.S. We expect the sales of Ameluz® in the U.S. to increase in the near term as we continue to develop our sales operations.

 

Revenue from our development projects with Maruho was €0.8 million during the six months ended June 30, 2017. During the six months ended June 30, 2016, we had no revenue from these projects.

 

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Cost of sales

 

Cost of Sales
   Six months ended
June 30,
   Increase (decrease) 
   2017   2016   Amount   Percentage 
   € thousands (except percentages) 
Cost of sales   (635)   (764)   129    (17)%

 

Cost of sales was €(0.6) million for the six months ended June 30, 2017, compared to €(0.8) million for the six months ended June 30, 2016, a decrease of €129 thousand, mainly due to a reduction in production costs at our pharmaceutical ingredient supplier.

 

Research and development expenses

 

Research and Development Expenses
   Six months ended
June 30,
   Increase (decrease) 
   2017   2016   Amount   Percentage 
   € thousands (except percentages) 
Clinical studies (external expenses)   (750)   (613)   137    22%
FDA and EMA Fees   (404)   (85)   319    375%
Other research and development expenses   (1,031)   (1,154)   (123)   (11)%
Total research & development expenses   (2,185)   (1,852)   333    18%

 

Research and development expenses were €2.2 million for the six months ended June 30, 2017, compared to €1.9 million for the six months ended June 30, 2016, an increase of €333 thousand, or 18%. This increase was mainly due to higher fees paid to regulatory bodies such as the FDA and the EMA.

 

Sales costs

 

Sales Costs
   Six months ended
June 30,
   Increase (decrease) 
   2017   2016   Amount   Percentage 
   € thousands (except percentages) 
Personnel expenses   (4,958)   (1,606)   (3,352)   (209)%
Trade shows and marketing material   (469)   (294)   (175)   (60)%
Logistics and other   (2,848)   (932)   (1,916)   (206)%
Total sales costs   (8,275)   (2,832)   (5,443)   (192)%

 

Sales costs were €8.3 million for the six months ended June 30, 2017, compared with €2.8 million for the six months ended June 30, 2016, an increase of €5.5 million, or 192%.

 

During the six months ended June 30, 2017, we further invested in building a sales and marketing infrastructure in the U.S., hiring qualified personnel and incurred expenses for marketing activities in the U.S. following the approval by the FDA. The increase in sales costs was mainly due to these investments in the U.S., which we expect to continue to incur. As our presence becomes more established in the U.S. we plan to leverage our sales professionals and will seek to generate more revenue per person so that revenues related to efforts from these salespersons exceed their cost.

 

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General and administrative expenses

 

General and Administrative Expenses
   Six months ended
June 30,
   Increase (decrease) 
   2017   2016   Amount   Percentage 
   € thousands (except percentages) 
General and administrative expenses   (1,696)   (1,372)   (324)   24%

 

General and administrative expenses increased by 24%, to €1.7 million for the six months ended June 30, 2017, compared to €1.4 million for the six months ended June 30, 2016. This increase was mainly due to higher cost of financing.

 

Interest income and expense

 

Interest Income and Expense
   Six months ended
June 30,
   Increase (decrease) 
   2017   2016   Amount   Percentage 
   € thousands (except percentages) 
Interest Expense   (330)   (594)   264    45%
Interest Income   4    2    2    100%

 

Interest expense decreased by €264 thousand, to €0.3 million for the six months ended June 30, 2017, compared to €(0.6) million for the six months ended June 30, 2016 due to the repayment of our warrant bond in December 2016.

 

Other income and (expense), net

 

Other Income and (Expense), Net
   Six months ended
June 30,
   Increase (decrease) 
   2017   2016   Amount   Percentage 
   € thousands (except percentages) 
Other income and (expense), net   (626)   2,232    (2,858)   (128)%

 

Other income (expense), net was €(0.6) million for the six months ended June 30, 2017, compared to income of €2.2 million for the six months ended June 30, 2016. A significant portion of this decrease was attributable to the reimbursement of the €2.1 million PDUFA fee that had a one-time effect in March 2016. An increase of €0.7 million in other expenses was driven mainly by foreign currency exchange movements.

 

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Comparison of Fiscal Years Ended December 31, 2016 and December 31, 2015

 

Total revenue

 

Total Revenue
   Year ended
December 31,
   Increase (decrease) 
   2016   2015   Amount   Percentage 
   € thousands (except percentages) 
Germany   2,515    3,028    (513)   (17)%
United States   1,153    0    1,153    n/a 
Other International Revenues   1,247    1,040    207    20%
One Time License Payments   40    70    (30)   (43)%
Maruho Development Project   1,177    0    1,177    n/a 
Total Revenue   6,132    4,138    1,994    48%

 

Revenue for the fiscal year ended December 31, 2016 increased by approximately 48%, to €6.1 million, from €4.1 million for the fiscal year ended December 31, 2015.

 

During the fiscal year ended December 31, 2016, we recorded €2.5 million of revenue in Germany, which represents a decrease of €513 thousand or 17% compared to the fiscal year ended December 31, 2015. This decrease was mainly due to the change of competitive landscape following the introduction in the EU of a drug identical to Metvix® and approved for daylight photodynamic therapy.

 

During the fiscal year ended December 31, 2016, we recorded revenue of €1.3 million from the sale of products in other European countries, either to our distribution partners or from our own sales in countries other than Germany. This represents an increase of €207 thousand or 20%.

 

During the fiscal year ended December 31, 2016, we further recorded €1.2 million revenue in the U.S. We launched commercialization of Ameluz® and BF-RhodoLED® for actinic keratosis in the U.S. in October 2016 and thus earned revenue in the U.S. for only a small part of the year. We expect annual revenue in the U.S. to increase significantly in 2017 as compared to 2016.

 

Revenue from the development projects with Maruho was €1.2 million during the fiscal year ended December 31, 2016. In 2015 we had no revenue from these projects.

 

We also recorded €40 thousand in license income during the fiscal year ended December 31, 2016. We received these license payments following the achievements of milestones as set forth in one of our license and supply agreements. We had €70 thousand in license income in the fiscal year ended December 31, 2015.

 

Cost of sales

 

Cost of Sales
   Year ended
December 31,
   Increase (decrease) 
   2016   2015   Amount   Percentage 
   € thousands (except percentages) 
Cost of sales   (1,652)   (1,236)   416    34%

 

Cost of sales was €1.7 million for the year ended December 31, 2016, compared to €1.2 million for the year ended December 31, 2016, an increase of €416 thousand. This increase resulted primarily from a higher volume of products sold during the period.

 

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Research and development expenses

 

Research and Development Expenses
   Year ended
December 31,
   Increase (decrease) 
   2016   2015   Amount   Percentage 
   € thousands (except percentages) 
Clinical studies (external expenses)   (1,356)   (1,833)   477    35%
FDA and EMA Fees   (932)   (2,072)   1,140    122%
Other research and development expenses   (2,352)   (2,299)   (53)   (2)%
Total research & development expenses   (4,640)   (6,204)   1,564    25%

 

Research and development expenses were €4.6 million for the fiscal year ended December 31, 2016, compared to €6.2 million for the fiscal year ended December 31, 2015, a decrease of €1.6 million, or 25%. This decrease was mainly due to a PDUFA fee of €2.1 million that we had to pay to the FDA upon submission of our New Drug Application in 2015. This fee is usually waived for small companies for their initial submission. In consultation with the FDA, Biofrontera lodged an application for a waiver of this fee, but this could not be processed on the filing date as the FDA did not have a process for handling such applications. This fee was refunded by the FDA in March 2016 and was recorded in other income in fiscal year 2016.

 

Research and development expenses incurred in 2015 and 2016 were related to our clinical and drug and medical device development programs as well as expenses associated with maintaining the European approval dossier, preparing regulatory documentation and filing with regulatory authorities in other regions, in particular with the FDA in the U.S. for Ameluz® and our BF-RhodoLED® lamp. A minor part of our expenses were associated with filing and maintaining our patents and other intellectual property rights.

 

Sales costs

 

Sales Costs
   Year ended
December 31,
   Increase (decrease) 
   2016   2015   Amount   Percentage 
   € thousands (except percentages) 
Personnel expenses   (5,063)   (1,965)   (3,098)   (158)%
Trade shows and marketing material   (566)   (670)   104    16%
Logistics and other   (3,134)   (1,535)   (1,599)   (104)%
Total sales costs   (8,763)   (4,170)   (4,593)   (110)%

 

Sales costs were €8.8 million for the fiscal year ended December 31, 2016, compared with €4.2 million for the fiscal year ended December 31, 2015, an increase of €4.6 million, or 110%.

 

Sales costs include salaries and other benefits for our sales and marketing teams in Germany and Spain, costs for marketing material such as flyers and promotional materials distributed to physicians, costs for marketing events such as symposia and scientific meetings, as well as marketing expenses incurred in the UK by our contract partner Spirit Healthcare and reimbursed by us until the contract with Spirit Healthcare terminated in July 2015. During the fiscal year ended December 31, 2016, we further invested in building a sales and marketing infrastructure in the U.S., hiring qualified personnel and incurred expenses for marketing activities in the U.S. following the approval by the FDA. The increase in sales costs was mainly due to these investments in the U.S., which we expect to continue to incur.

 

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General and administrative expenses

 

General and Administrative Expenses
   Year ended
December 31,
   Increase (decrease) 
   2016   2015   Amount   Percentage 
   € thousands (except percentages) 
General and administrative expenses   (2,853)   (2,759)   94    3%

 

General and administrative expenses increased by 3%, to €2.9 million for the fiscal year ended December 31, 2016, compared to €2.8 million for the fiscal year ended December 31, 2015. This increase was mainly due to higher financing expenses.

 

Interest income and expense

 

Interest Income and Expense
   Year ended
December 31,
   Increase (decrease) 
   2016   2015   Amount   Percentage 
   € thousands (except percentages) 
Interest Expense   (1,207)   (1,169)   (38)   (3)%
Interest Income   3    9    (6)   (67)%

 

Interest income was €3 thousand during the fiscal year ended December 31, 2016, compared with €9 thousand during the fiscal year ended December 31, 2015.

 

The interest expense in the fiscal years ended December 31, 2016 and December 31, 2015 was €1.2 million and €1.2 million, respectively. Interest expense consists primarily of interest payable for our 2009/2017 warrant bonds issued in 2009, or Warrant Bond I (€0.5 million in the fiscal year ended December 31, 2016, and €0.4 million in fiscal year ended December 31, 2015) and for our 2011/2016 warrant bonds issued in 2011, or Warrant Bond II (€0.7  million in the fiscal year ended December 31, 2016, and €0.7 million in the fiscal year ended December 31, 2015), calculated using the effective interest method. The interest payments for the 2014 calendar year for Warrant Bond I and Warrant Bond II were made in January 2015. The payment of interest on Warrant Bond I for the 2015 calendar year was made in the end of December 2015, and the payment of interest on Warrant Bond II for the 2015 calendar year was made in the beginning of January 2016.

 

Other income and (expense), net

 

Other Income and (Expense), Net
   Year ended
December 31,
   Increase (decrease)
   2016   2015   Amount   Percentage
   € thousands (except percentages) 

Other income and (expense), net

   (2,404)   (187)   (2,217)  Not meaningful

 

Other income (expense), net was €(2.4) million for the fiscal year ended December 31, 2016, compared with €(0.2) million for the fiscal year ended December 31, 2015. A significant portion of this increase was attributable to the reimbursement of the PDUFA fee as discussed under “Research and development expenses”.

 

Liquidity and Capital Resources

 

We devote a substantial portion of our cash resources to research and development and sales, general and administrative activities primarily related to the commercialization of our products, Ameluz® and BF-RhodoLED®. We have financed our operations primarily with the proceeds of the issuance and sale of equity securities, warrant bonds and convertible bonds and, since May 2017, with proceeds from the EIB credit facility, and supply revenue and licensing income from some of our distribution partners. To date, we have generated supply revenue from direct sales in Germany, Spain and the UK as well as from sales to distribution partners in some European countries.

 

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We have incurred losses and generated negative cash flows from operations since inception. As of June 30, 2017, we had an accumulated deficit of €129.1 million. As of June 30, 2017, we had cash and cash equivalents of €11.5 million. In May 2017, we entered into the EIB credit facility under which EIB agreed to provide us with loans of up to €20 million in the aggregate. After June 30, 2017, we borrowed €10 million under the EIB credit facility, all of which remains outstanding as of the date of this prospectus. We cannot borrow more than €10 million in the aggregate under the EIB credit facility until we achieve revenues of €15 million on a 12-month rolling basis, and we must meet other conditions in order to borrow the full amount. See “Description of Our Principal Financing Documents — European Investment Bank Loan Commitment and Security Agreements” below.

 

The following table summarizes our cash flows from operating, investing and financing activities for the periods presented:

 

   Six months ended
June 30,
   Year ended
December 31,
 
   2017   2016   2016   2015 
   € thousands 
Consolidated Statement of Cash Flows Data:                    
Net cash provided by (used in):                    
Operating activities   (8,087)   (2,511)   (10,259)   (9,655)
Investing activities   (192)   (143)   (455)   17 
Financing activities   4,605    8,867    21,881    5,088 
Net increase (decrease) in cash and cash equivalents   (3,674)   6,213    11,167    (4,550)

 

Operating Activities

 

For the fiscal years ended December 31, 2016 and December 31, 2015, our net cash used in operating activities was €10.3 million and €9.7 million, respectively. The increase in net cash used in operating activities in the fiscal year ended December 31, 2016 resulted primarily from an increase in operating loss for the year.

 

For the six months ended June 30, 2017, our net cash used in operating activities was €8.1 million, compared with €2.5 million in the six months ended June 30, 2016. This increase in net cash used in operating activities for the six months ended June 30, 2017 resulted primarily from the €2.1 million in cash received from the FDA during the six months ended June 30, 2016 for the reimbursement of the PDUFA fee that did not recur during the six months ended June 30, 2017. In addition, trade payables decreased by €1.7 million as of June 30, 2017.

 

Investing Activities

 

For the fiscal year ended December 31, 2016, our net cash used in investing activities was €0.5 million, compared to cash provided by investing activities of €17 thousand for the fiscal year ended December 31, 2015. The net cash used in investing activities in the fiscal years ended December 31, 2016 and December 31, 2015 was primarily for the purchases of tangible and intangible assets.

 

For the six months ended June 30, 2017 and the six months ended June 30, 2016, our cash used in investing activities was €0.2 million and €0.1 million, respectively. This increase was primarily driven by capital expenditures.

 

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Financing Activities

 

Our net cash provided by financing activities was €21.9 million for the fiscal year ended December 31, 2016 compared to €5.1 million for the fiscal year ended December 31, 2015. The cash provided by financing activities for the fiscal year ended December 31, 2016 was primarily the result of the issuance of shares in our rights offering as well as the issuance of convertible bonds, providing net proceeds of €29.0 million. In the fiscal year ended December 31, 2015, we generated net proceeds of €6.3 million from the issuance of our ordinary shares.

 

For the six months ended June 30, 2017 and the six months ended June 30, 2016, our cash flow from financing activities was €4.6 million and €8.9 million, respectively. This decrease was primarily driven by capital increases in the six months ended June 30, 2016. The proceeds of the convertible bond issuance of €5.0 million in January 2017 were lower than the aggregate proceeds from our issuances of shares (€9.3 million) in the same period of 2016.

 

Future Capital Requirements

 

We believe that our existing cash and cash equivalents, the credit facilities available to us under the EIB credit facility, the anticipated net proceeds from this offering, and revenue from product sales and future milestone or license payments will be sufficient to enable us to fund our operating expenses and to advance our commercialization strategy in the U.S. for the next 12 months. After such period, however, we will require additional public or private equity offerings, debt financings, corporate collaboration and licensing arrangements or other financing alternatives to meet our working capital requirements and to fund the continuing commercialization of our existing products and the launch of any new products in the U.S., the EU or other jurisdictions. Our existing financing arrangements place important restrictions on our ability to raise additional debt. See “Description of Our Principal Financing Documents” below.

 

Our need for additional sources of liquidity and capital will depend significantly on the level and timing of regulatory approval and product sales, as well as the extent to which we choose to establish collaboration, co-promotion, distribution or other similar agreements for our products and product candidates. Moreover, changing circumstances may cause us to spend cash significantly faster than we currently anticipate, and we may need to spend more cash than currently expected because of circumstances beyond our control.

 

We expect to continue to incur substantial additional operating losses from significant sales, marketing and manufacturing expenses in the U.S as we seek to expand the commercialization of Ameluz® in the U.S. and undertake further clinical trials and other activities related to extending the approved indications for Ameluz®. In addition, we expect to incur additional expenses to add and improve operational, financial and information systems and personnel, including personnel to support our product commercialization efforts. We also expect to incur significant costs to continue to comply with corporate governance, internal controls and similar requirements applicable to us as a public company in the U.S and in Germany.

 

Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:

 

·the costs of our commercialization activities for Ameluz®, most importantly in the U.S.;

 

·the scope, progress, results and costs of development for extending indications for Ameluz®;

 

·the costs of maintaining and extending our regulatory approvals;

 

·the extent to which we acquire or invest in products, businesses and technologies;

 

·the extent to which we choose to establish collaboration, co-promotion, distribution or other similar agreements for our products; and

 

·the costs of preparing, submitting and prosecuting patent applications and maintaining, enforcing and defending intellectual property claims.

 

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We may not have sufficient funds and may be unable to arrange for additional financing to pay the amounts due under our existing debt obligations, in particular the minimum €13 million payment that we must make on July 6, 2022. To the extent that our capital resources are insufficient to meet our future operating and capital requirements, we will need to finance our cash needs through public or private equity offerings, debt financings, corporate collaboration and licensing arrangements or other financing alternatives. We have no committed external sources of funds, other than the EIB credit facility, under which future borrowings are subject to draw conditions, including, the achievement of specified milestones. Additional equity or debt financing or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. In addition, the covenants under our existing debt obligations could limit our ability to obtain additional debt financing. For example, under the EIB credit facility, we are not permitted to incur additional third-party debt in excess of €1 million without the prior consent of EIB (subject to certain exceptions).

 

If we raise additional funds by issuing equity securities, our shareholders will experience dilution. Any additional debt financing or additional equity that we raise may contain terms that are not favorable to us or our shareholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.

 

Contractual Obligations

 

Set forth below is a description of our contractual obligations as of December 31, 2016:

 

   Payments due by period 
Contractual Obligations  Total   Less
than 1
year
   1-3
years
   3-5
years
   More
than 5
years
 
   € thousands 
Operating leases   4,719    817    1,326    956    1,620 
Warrant bond 2009/2017(1)   5,226        5,226         
Interest   394    394             
Convertible bond 2016/2021   190            190     
Interest   55    11    22    22     
Total(2)(3)   10,584    1,222    6,574    1,168    1,620 

 

(1) This warrant bond was repaid in full on August 3, 2017.

(2) In January 2017, we issued convertible bonds maturing on January 1, 2022 in the aggregate initial principal amount of €5 million of which €2.3 million has already been converted into shares as of the date of this prospectus. We are obligated to pay interest on the outstanding principal amount of these bonds at a rate of 6.0% per annum.

(3) We have borrowed €10 million under our EIB credit facility. These borrowings mature on July 6, 2022. We pay interest on these borrowings quarterly at a rate per annum equal to EURIBOR plus 4%. In addition, these borrowings accrue deferred interest, which is payable in its entirety at maturity, at a rate of 6.0% per annum. At maturity, we also must pay a performance participation interest amount. Thus, on July 6, 2022, we will be required to repay €10 million in principal, plus €3 million in deferred interest and an additional amount of performance participation interest under the EIB credit facility. See “Description of Our Principal Financing Documents—European Investment Bank Loan Commitment and Security Agreements” for more information.

 

Our long-term commitments under operating leases shown above consist of payments relating to our facility leases in Leverkusen, Germany, which all expire by 2025 and our facility lease in Wakefield, Massachusetts. Operating leases also include contracts for the lease of certain office equipment as well as our obligations under lease contracts for company cars.

 

Description of Principal Financing Documents

 

European Investment Bank Loan Commitment and Security Agreements

 

On May 19, 2017, we entered into a Finance Contract with EIB, whereby EIB has committed to lend to us up to €20 million. The loan terms specify that the amounts drawn will be used to finance up to approximately 50% of specified research and development expenses forecast to be made by us between 2017 and 2020. The key terms of the EIB credit facility are as follows:

 

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·Term and Availability. The EIB credit facility can be drawn in up to four tranches each in a minimum amount of €5 million, each of which matures 5 years from the scheduled date of disbursement for the relevant tranche. The final availability date for the EIB credit facility is May 19, 2019.

 

·Conditions to disbursement. We have already drawn the first €10 million of the loan commitment in the form of two €5 million tranches. We may draw up to an additional €5 million (for a total aggregate draw of up to €15 million) if we provide evidence satisfactory to EIB that we have reached consolidated revenues of €15 million on a 12-month rolling basis, and we may draw up to a further €5 million (for a total aggregate draw of up to €20 million) if we provide evidence satisfactory to EIB that we have reached consolidated revenues of €35 million on a 12-month rolling basis and that we have raised at least an additional €5 million in equity financing.

 

·Use of Proceeds and Co-Funding Requirement. We are required to use proceeds from the EIB credit facility in order to fund post-marketing level clinical trials to produce data for obtaining regulatory clearance in the EU and U.S. for Ameluz® in different indications and treatment modalities, referred to as the “Project”. In addition, we are required to ensure that we have available, and to expend, our own funds to finance approximately 50% of the Project budget (which is approximately €40 million in total). This means that, for any given year we may use the EIB credit facility to finance only approximately 50% of costs related to the Project.

 

·Interest. There are three components to the interest we pay under the EIB credit facility: quarterly floating interest payments, a deferred interest payment, and a performance participation interest payment. We make floating interest payments each quarter based on a rate per annum equal to EURIBOR plus 4.00%. The deferred interest and the performance participation interest payments are payable in full when the relevant tranche matures (or on any earlier prepayment date). Deferred interest accrues daily on each €5 million tranche at a rate of 6.0% per annum. For each €5 million tranche, the performance participation interest amount is equal to the product of EIB’s disbursement date notional equity proportion in respect of such tranche multiplied by our market capitalization on the maturity date of such tranche. The disbursement date notional equity proportion in relation to the outstanding €10 million loan is 0.64%.

 

·Restriction on Debt. We are not permitted to incur additional third-party debt in excess of €1 million without the prior consent of EIB. This restriction is subject to certain exceptions, such as for ordinary course deferred purchase arrangements and, subject to maximum amounts, various types of leases.

 

·Events of Default. The EIB credit facility contains a number of provisions allowing EIB to accelerate the payment of all or part of amounts outstanding under the EIB credit facility, including customary acceleration provisions for failure to make payments, inaccuracy of representations and warranties, default on other loan obligations (cross-default), illegality or change of law, and events relating to bankruptcy, insolvency and administration. In addition, EIB may accelerate upon any event or change in condition which in the opinion of EIB has a material adverse effect on our business, operations, property, condition (financial or otherwise) or prospects, or on the business, operations, property, condition (financial or otherwise) or prospects of Biofrontera Bioscience GmbH, Biofrontera Pharma GmbH or Biofrontera Inc.

 

·Other Covenants. Subject in each case to certain exceptions, the EIB credit facility contains negative covenants and restrictions, including among others: restrictions on the granting of security, on the provision of loans and guarantees, on the disposal of assets and on a change of business. Furthermore, we must retain 100% ownership of Biofrontera Bioscience GmbH, Biofrontera Pharma GmbH and Biofrontera Inc. and 51% ownership of any other subsidiary whose gross revenues, total assets or EBITDA represent 5% or more of our consolidated gross revenues, total assets or EBITDA. The EIB credit facility also contains affirmative covenants, such as the execution of the Project as described in the EIB credit facility agreement, mandatory periodic reporting of financial and other information and the notification upon the occurrence of any event of default.

 

·Cancellation Upon Project Cost Reduction. If it is determined that the total principal amount of the loan drawn by us exceeds 50% of the total cost of the Project, EIB may cancel the undisbursed portion of the loan and demand prepayment of the loan up to the amount by which the loan, excluding accrued interest, exceeds 50% of the total cost of the Project.

 

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Convertible Bond II

 

In January 2017, we issued a convertible bond with an aggregate principal amount of €4.999 million, which is divided into 49,990 non-registered pari passu ranking bonds, each with a principal amount of €100. These bonds bear interest at a rate of 6% per annum on their principal amount from and including February 1, 2017. We must pay interest on these bonds semi-annually in arrears on January 1 and July 1 of each year. We must redeem these bonds in full on January 1, 2022, by paying the outstanding principal amount, together with accrued interest on the principal amount until (but excluding) the maturity date, unless they have previously been redeemed or converted or purchased and cancelled. The bonds were offered on a preemptive basis to all existing shareholders and were fully subscribed.

 

The terms and conditions of these bonds provide that each bondholder is entitled to declare due and payable the entire principal amount and any other claims arising from the bonds if we fail to pay within 30 days after the relevant payment date any amounts due and payable on the bonds or we exceed the “permissible indebtedness” under the terms and conditions by incurring additional debt. We will be deemed to exceed the “permissible indebtedness” if, as a result of our incurrence of any debt, both (1) our “net financial indebtedness” exceeds €25 million, and (2) our “net indebtedness quota” exceeds 4.0. “Net financial indebtedness” is defined as (i) the sum of long-term financial liabilities and short-term financial debt, less (ii) cash and cash equivalents, and “net indebtedness quota” is defined as the quotient of (i) our “net financial indebtedness” divided by (ii) our EBITDA (as defined in the terms and conditions of the bonds). For purposes of these calculations, all relevant figures are determined based on our most recent published annual or interim quarterly financial reports at the time we incur additional debt. We will not be deemed to exceed the “permissible indebtedness” if the “net indebtedness quota” exceeds 4.0 due to a reduction of our EBITDA.

 

We granted each bondholder the right to convert its bonds, at any time, in whole but not in part, into our ordinary shares, at a conversion price per share equal to: €3.50 per share from the date of issuance until March 31, 2017; €4.00 per share from April 1, 2017 until December 31, 2018; and €5.00 per share from January 1, 2018 until maturity. As of the date of this prospectus, a principal amount of €2.3 million of these convertible bonds has been converted into shares.

 

Convertible Bond I

 

In December 2016, we issued a convertible bond with a maturity date of January 1, 2021 (“Convertible Bond I”). The Convertible Bond I has an aggregate principal amount of €4.999 million, which is divided into 49,990 non-registered pari passu ranking bonds, each with a principal amount of €100. These bonds bear interest at a rate of 6% per annum on their principal amount from and including January 1, 2017. The bonds were offered on a preemptive basis to all existing shareholders and were fully subscribed. As of the date of this prospectus, a principal amount of €4,916,000 of these convertible bonds have been converted into our ordinary shares.

 

The terms and conditions of the Convertible Bond I do not contain any financial or other covenants that would have a material impact on our ability to incur additional indebtedness. For more information on Convertible Bond I and Convertible Bond II, see Note 10 (Financial Liabilities) to our audited consolidated financial statements for the years ended December 31, 2016 and 2015.

 

Off-Balance Sheet Transactions

 

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

 

The consolidated financial statements of Biofrontera for the fiscal year ending December 31, 2016 have been prepared in accordance with the International Financial Reporting Standards, or IFRS, of the International Accounting Standards Board, or IASB, and the interpretations of the International Financial Reporting Standards Interpretations Committee, or IFRS IC, which are endorsed by the EU and applicable on the balance sheet date. In addition, statutory provisions pursuant to Section 315a (1) of the German Commercial Code have been complied with.

 

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The assets and liabilities are recognized and measured in accordance with the IFRS that were required on December 31, 2016.

 

The preparation of the consolidated financial statements for the fiscal year ended December 31, 2016 in accordance with IFRS required the use of estimates and assumptions by the management that affect the value of assets and liabilities – as well as contingent assets and liabilities – as reported on the balance sheet date, and revenues and expenses arising during the fiscal year. The main areas in which assumptions, estimates and the exercising of a degree of discretion are appropriate relate to the determination of the useful lives of non-current assets and the formation of provisions, as well as income taxes. Estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances. They are continuously reviewed but may vary from the actual values.

 

While our significant accounting policies are more fully discussed in Note 1 to our consolidated financial statements included in this prospectus, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements. We have reviewed these critical accounting policies and estimates with the audit committee of our supervisory board.

 

Revenue Recognition

 

Our company recognizes revenue in accordance with IAS 18 if the risks and opportunities connected with ownership have transferred to the customer. The company realizes its revenue primarily through the sale of its products. Income from milestone and licensing agreements with third parties are recognized once the underlying contractual conditions come into effect. The receipt of revenue can always be fully and immediately recognized as revenue if the conditions of IAS 18 IE 20 are met in the form of a one-off contract start payment.

 

Revenue and other income are recognized if the amount can be measured reliably and payment is sufficiently probable as well as other conditions mentioned below are met. All income in connection with the sale of products and license income is recognized as revenue. Revenue is deemed to be realized when the deliveries and services owed have been provided and substantial risk and chances have been passed to the acquirer.

 

Most of our revenue is generated by product sales. The sale of Ameluz® almost exclusively occurs in Europe through pharmaceutical wholesalers or, to a lesser extent, directly to pharmacies or hospitals. Sales in the U.S. are primarily directly to physicians, hospitals or other qualified healthcare providers. Above and beyond this, in the fiscal year ended December 31, 2016, a considerable portion of sales revenue was achieved through passing costs on to Maruho as part of the collaboration and partnership agreement we have entered into with Maruho.

 

In the case of direct sales of our BF-RhodoLED® lamps, the delivered products and services on which amounts are owed are settled only after complete installation, since the installation services require specialized knowledge, are not just an ancillary service and, for legal reasons, the lamp may only be used by the customer after successful installation. In the case of lamps on loan, that is, lamps already installed for testing by buyers before a purchase, the preconditions are met through the origination of a valid purchase agreement and the generation of an outgoing invoice.

 

Belixos® is predominantly sold through local Amazon websites in the EU. Revenue is recognized after delivery and payment by the customer. Based on experience, return rights granted with the sale through Amazon are exercised by customers in very few cases.

 

Revenue is recognized, less revenue based trade taxes and sales deductions. Expected sales deductions, such as rebates, discounts or returns, are recognized based on estimated values at revenue recognition. Payment terms for Ameluz® include short-term payment terms with a possibility for sales rebates. Instalment payments over 48 months, which include a financing component, are sometimes agreed upon with the sale of our BF-RhodoLED® lamp.

 

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License income as well as milestone-based payments are recognized when the contractual obligation has been fulfilled.

 

Share-Based Payments

 

Share options (equity-settled share-based payments) are valued at the fair value on the date of granting. The fair value of the obligation is capitalized as a personnel expense over the retention period. Obligations relating to cash-settled share-based payment transactions are recognized as liabilities and are measured at the fair value on the balance sheet date. In the event that we have the right to choose between payment in cash or payment using shares when a right is exercised, an increase in the capital reserve is initially performed pursuant to IFRS 2.41 and IFRS 2.43. The costs are recognized over the vesting period.

 

The fair market value of share options are estimated using the Monte Carlo Simulation valuation model and we use the following methods to determine its underlying assumptions: expected volatilities are based on our calculation of annualized volatilities (based on daily prices and assuming 250 trading days per year) of around 49.00%; the expected term of options granted is based on the assumption that the option holders will exercise their options evenly within the exercise window (years 5 and 6 after the grant date) and have imputed a standardized five-year holding period; the risk-free interest rate of-0.49% is based on the valuation date for a five-year term (spot rate) from the yield curve; and the expected returns are based on applying the capital asset pricing model (CAPM) using the yield curve to first calculate the standard risk-free rate for a perpetual term as applicable on the valuation date. Forfeitures are estimated at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

Research and Development Expenses

 

Pursuant to IAS 38, development costs are recognized as "intangible assets" under certain conditions. Research costs are recognized as costs as they are incurred. Development costs are capitalized if certain conditions are fulfilled depending on the possible outcome of development activities.

 

Estimates of such possible outcomes involve management making significant assumptions. In the management's opinion, due to uncertainties related to the development of new products, the criteria prescribed under IAS 38.57 "Intangible Assets" for capitalising development costs as assets are only fulfilled by us if the prerequisites for the expansion of the European approval and the approval in the U.S. are met, and if it is likely a future economic benefit will accrue to the company.

 

The research and development costs relating to Ameluz®, which has been approved in Europe, and to our company's other research and development projects are expensed in the period in which they are incurred, based on industry standards. Almost all research and development expenses for a drug product are incurred before clinical phase III trials are completed. Whether or not a product may receive approval or could be commercialized and generate cash flows at all can only be determined once data from such phase III trials are available, and consequently development costs cannot be capitalized.

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to various risks in relation to financial instruments including credit risk, liquidity risk and currency risk. Our risk management is coordinated by our management board. We do not engage in the trading of financial assets for speculative purposes. The most significant financial risks to which we are exposed include the following discussed below. Please see Note 14 (Reporting on Financial Instruments) to our Consolidated Financial Statements for additional information.

 

Liquidity risk

 

We have been dependent on our shareholders and bondholders for the funding of our operations. As described in Note 1 of our consolidated financial statements, our ability to continue as a going concern is dependent on our ability to raise additional funds by way of debt and/or equity offerings to enable us to fund our clinical trial programs and commercialization plans. We believe that our existing cash and cash equivalents, the credit facilities available to us under the EIB credit facility, the anticipated net proceeds from this offering, and revenue from product sales and future milestone or license payments will be sufficient to enable us to fund our operating expenses and to advance our commercialization strategy in the U.S. for the next 12 months. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. We will require additional capital for the further development and commercialization of our products and product candidates. We may need substantial additional funds to fully develop, manufacture, market and sell our other potential products. See “Risk Factors”.

 

Currency risk

 

We are subject to currency risk, as our income and expenditures are denominated in Euro, Swiss Francs and the U.S. dollar. As such we are exposed to exchange rate fluctuations between such foreign currencies and the Euro. We aim to match foreign currency cash inflows with foreign cash outflows where possible. We do not hedge this exposure. If we increase sales of our products in the U.S., we would expect to have significant increases in cash balances, revenues and sales and marketing costs denominated in U.S. dollars and in Swiss Francs, while we would expect the majority of our development and operating costs to remain denominated in Euro. Between January 2014 and July 2017, the exchange rate between the U.S. dollar and the euro ranged between 1.03903 dollars per euro and 1.39305 dollars per euro, and the exchange rate between the Swiss franc and the euro ranged between 0.98665 Swiss franc per euro and 1.23805 Swiss franc per euro.

 

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BUSINESS

 

Overview

 

We are an international biopharmaceutical company specializing in the development and commercialization of a platform of pharmaceutical products for the treatment of dermatological conditions and diseases caused primarily by exposure to sunlight that results in sun damage to the skin. Our approved products focus on the treatment of actinic keratoses, which are skin lesions that can sometimes lead to skin cancer, as well as the treatment of basal cell carcinoma in the EU. We conduct our own research and development and, in several regions, including the U.S., market and sell our own products.

 

Our principal product is Ameluz®, which is a prescription drug approved for use in combination with photodynamic therapy (when used together, “Ameluz® PDT”) in all of the countries of the EU (including the UK), in Switzerland, in Israel and in the U.S. for the treatment of actinic keratosis of mild to moderate severity on the face and scalp. We are currently selling Ameluz® for this indication in the U.S., in 11 countries in Europe and in Israel.

 

In addition, in the EU, Ameluz® is currently approved by the European Commission for the photodynamic therapy treatment field cancerization (entire skin areas infiltrated by tumor cells and entailing several actinic keratoses), as well as superficial and/or nodular basal cell carcinoma unsuitable for surgical treatment due to possible treatment-related morbidity and/or poor cosmetic outcome. We are also seeking to extend the approved indications in the EU for Ameluz® to include treatment for actinic keratosis with Ameluz® in combination with daylight photodynamic therapy (i.e., using natural daylight to activate the drug), which we applied for in the second quarter of 2017. As further described below, we plan to seek further extensions of the approved indications for Ameluz® photodynamic therapy in both the EU and the U.S.

 

The following table summarizes the indications for which we are currently approved to market Ameluz® or for which we are in the process of seeking approval to market Ameluz®, as well as products currently in development, organized by territory*:

 

 

* “CH” = Switzerland; “IL” = Israel

† Timeline for pursuing phase III trial to be determined

 

Recent Achievements

 

In 2016, we reached several milestones for our business by executing our strategies of expanding worldwide sales of our products and extending the approved indications of Ameluz® PDT.

 

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In the six months ended June 30, 2017, our sales revenue increased 193% to €5.0 million compared to €1.7 million in the same period the year before, reflecting mainly our entry into the U.S. market. During the year ended December 31, 2016, our sales increased 48% to €6.1 million compared to €4.1 million for the year ended December 31, 2015.

 

In May 2016, we received approval from the FDA to market in the U.S. Ameluz® in combination with photodynamic therapy using our BF-RhodoLED® lamp for lesion-directed and field-directed treatment of actinic keratoses of mild-to-moderate severity on the face and scalp. We launched the commercialization of Ameluz® and BF-RhodoLED® for actinic keratosis in the U.S. in October 2016.

 

In 2016, we also received approvals by the European Commission of label extensions for Ameluz® to include the treatment of field cancerization and superficial and/or nodular basal cell carcinoma unsuited for surgical treatment due to possible treatment-related morbidity and/or poor cosmetic outcome. In addition, during that year we reported positive Phase III results for Ameluz® in combination with daylight photodynamic therapy. We submitted to the EMA our application (which included the Phase III data) for label extension during the second quarter of 2017.

 

In 2016, we began to hire employees in the U.S., including a sales force. As of the date of this prospectus, we have a sales force consisting of 30 employees who cover most of the continental U.S.

 

In July 2016, we entered into a collaboration and partnership agreement with Maruho, a pharmaceutical company based in Japan specializing in dermatology that is also an affiliate of Maruho Deutschland GmbH, a major shareholder of our company. This agreement provides for the joint development of up to four branded generic pharmaceutical product candidates using our proprietary formulation technology. Our planned indications for all four development projects with Maruho are atopic dermatitis and psoriasis.

 

In August 2017, we agreed with the FDA on the requirements necessary to obtain approval for our application of Ameluz® PDT for the treatment of superficial basal cell carcinoma in the U.S.   Under the agreed plan with FDA, our application could be based on a single additional phase III placebo-controlled pivotal trial to be conducted in the U.S., in which Ameluz® PDT will be compared to placebo PDT, which can be conducted with relatively few patients minimizing both time and expense. We will be required to present a combined read-out of clinical and histological clearance. We believe our agreement with the FDA on the requirements for the potential approval of our application to extend Ameluz® for the treatment of superficial basal cell carcinoma in the U.S. represents a significant milestone that should allow us to reduce cost and to achieve approval more quickly than if we had been required to undertake additional or more complex clinical trials. In December 2017, we filed an investigational new drug application with the FDA for our proposed phase III study protocol to evaluate Ameluz® PDT for the treatment of superficial basal cell carcinoma. This investigational new drug application enables us to initiate our phase III trial to be conducted in the U.S. to compare Ameluz® PDT to placebo PDT.

 

In November 2017, we achieved a significant milestone in our marketing efforts in the U.S. when the U.S. Center for Medicare and Medicaid Services (CMS) assigned us a unique, product-specific billing code for Ameluz®. The J-code for Ameluz® will become effective and available for use by doctors on January 2, 2018. A permanent J-code is generally required for a drug to be eligible for reimbursement by Medicare. Before a permanent J-code is obtained, doctors making reimbursement claims must apply for reimbursement by use of a “miscellaneous” code, which can create additional administrative hurdles and delay for the doctors to receive reimbursement, especially shortly after a drug has launched and payers are not yet familiar with claims for the new drug. Once the permanent J-code for Ameluz® becomes effective on January 2, 2018, we expect that the process of claiming reimbursement for Ameluz® will become easier for doctors in the U.S., which we expect to have a positive effect on our sales and revenue.

 

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Key Strengths

 

We believe we are well positioned for growth due to multiple drivers, including: our recent commercial launch of Ameluz® in the U.S. for treatment of actinic keratosis, our recent label extension in the EU of Ameluz® for treatment of field cancerization (larger areas of skin on the face and scalp with multiple actinic keratoses) and superficial and/or nodular basal cell carcinoma unsuitable for surgical treatment due to possible treatment-related morbidity and/or poor cosmetic outcome, our pending application for Ameluz® to be used in daylight PDT in the EU, proposed reimbursement changes for cryotherapy in U.S. In addition, we believe that there is a trend toward field therapy as opposed to single lesion therapy, which would make Ameluz® PDT more competitive versus treatments (such as cryotherapy) that are more suited to single lesion therapy.

 

Key Strengths include:

 

·Minimal clinical risk. Our principal product – Ameluz® – is now approved and commercialized in the U.S. to treat actinic keratosis (which can develop into squamous cell carcinoma) using our BF-RhodoLED® and in the EU to treat actinic keratosis, field cancerization (i.e., larger areas of skin on the face and scalp with multiple actinic keratoses) and, in certain circumstances, basal cell carcinoma, among other approvals.

 

·Ease of treatment. Ameluz® is an easy to use, non-invasive treatment that a physician applies directly to the skin, requires simple light activation and has shown no serious side effects.

 

·Expanding presence in U.S. and EU with an experienced in-house sales force. Sales of Ameluz®, which was recently launched commercially in the U.S., are increasing significantly, with recent quarterly revenue growth over 160%. We are leveraging our own experienced sales force to drive this growth.

 

· Strong pipeline. We recently submitted an application for approval of Ameluz® for use in daylight PDT in the EU. In addition, we are planning and/or have begun preparation for Phase III trials that will form the basis of applications we plan to submit to regulators for the treatment of basal cell carcinoma in the U.S. and squamous cell carcinoma in situ, actinic keratosis on the trunk and extremities and larger treatment areas for actinic keratosis, in each case in both the U.S. and the EU. In August 2017, we agreed with the FDA on the requirements for the potential approval of our application to extend Ameluz® PDT for the treatment of superficial basal cell carcinoma in the U.S., and in December 2017 we filed an investigational new drug application with the FDA for our proposed phase III study protocol to evaluate Ameluz® PDT for the treatment of superficial basal cell carcinoma. See “— Overview” and “— Recent Achievements” above for more information. In addition, we are pursuing research and development of up to four branded generic dermatology drugs under a collaboration and partnership agreement with Maruho, a pharmaceutical company based in Japan specializing in dermatology that is also an affiliate of Maruho Deutschland GmbH, a major shareholder of our company. See “Business — Our Research and Development Plans — Our Development Collaboration with Maruho” for more information.

 

Our strategy

 

Our principal objectives are to obtain regulatory approvals for the marketing of Ameluz® PDT for additional indications and in additional countries, and to increase the sales of our approved products. The key elements of our strategy include the following:

 

·geographic expansion of Ameluz® sales worldwide, including by:

 

·expanding our sales in the U.S. of Ameluz® in combination with our BF-RhodoLED® light device for the treatment of actinic keratosis and positioning Ameluz® to be a leading photodynamic therapy product in the U.S., by growing our dedicated sales and marketing infrastructure in the U.S.;

 

·expanding our sales in the EU of Ameluz® by marketing it for the treatment not only of actinic keratosis, but also for the treatment of field cancerization (larger skin areas containing potentially pre-cancerous cells and multiple actinic keratosis lesions) and basal cell carcinoma, indications for which we recently obtained approval; and

 

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·expanding our sales of Ameluz® in other countries where it is an approved product by entering into arrangements with distribution partners;

 

·extension of the approved indications for Ameluz® photodynamic therapy, including by:

 

·seeking to extend the approved label for actinic keratosis to include actinic keratosis lesions located other than on the head or scalp and increase the maximal size of the treatment field;

 

·seeking to extend the approved indications in the U.S. for Ameluz® in combination with our BF-RhodoLED® light device for the treatment of basal cell carcinoma;

 

·seeking to extend the approved indications in the EU for Ameluz® to include treatment for actinic keratosis with Ameluz® in combination with daylight photodynamic therapy, or exposure to sunlight, an indication for which we have recently applied in the EU and which we believe may increase the market potential of Ameluz® in such region (since Ameluz® could be used without doctor’s office procedures, which procedures can render photodynamic therapy treatment in European markets commercially unattractive due to lack of reimbursement); and

 

·seeking to extend the approved indications in the EU and U.S. for Ameluz® to additional indications, such as squamous cell carcinoma in situ, actinic cheilitis, acne, warts, wound healing, and/or cutaneous leichmania; all of which would require further clinical trials, and other research and development activities.

 

We also plan to develop additional drug candidates and seek partnerships or other opportunities for drug development collaborations, such as our collaboration and partnership agreement with Maruho Co., Ltd., or Maruho, and to continue to develop and expand marketing and sales of our cosmetic skin care products.

 

Our Products

 

Ameluz®

 

Our principal marketed product is Ameluz®. Ameluz® is used in photodynamic therapy to selectively remove tumor cells. We are currently selling Ameluz® in the U.S., in 11 countries in Europe and in Israel. We outsource the production of Ameluz® to a third party contract manufacturer in Switzerland.

 

In general, photodynamic therapy is a two-step process:

 

·the first step is the application of a drug known as a “photosensitizer,” or a pre-cursor of this type of drug, which tends to collect in cancerous cells; and

 

·the second step is activation of the photosensitizer by controlled exposure to a selective light source in the presence of oxygen.

 

During this process, energy from the light activates the photosensitizer. In photodynamic therapy, the activated photosensitizer transfers energy to oxygen molecules found in cells, converting the oxygen into a highly energized form known as “singlet oxygen,” which destroys or alters the sensitized cells.

 

The longer the wavelength of visible light, the deeper into tissue it penetrates. Different wavelengths, or colors of light, including red and blue light, may be used to activate photosensitizers. The selection of the appropriate color of light for a given indication is primarily based on two criteria:

 

·the desired depth of penetration of the light into the target tissue; and

 

·the efficiency of the light in activating the photosensitizer.

 

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In the U.S., our approved treatment method involves applying Ameluz® gel to individual or entire fields of actinic keratosis lesions, followed three hours later with exposure to our red light BF-RhodoLED® lamp for approximately ten minutes. In the EU, Ameluz® is also indicated for field cancerization and for superficial and/or nodular basal cell carcinoma unsuitable for surgical treatment due to possible treatment-related morbidity and/or poor cosmetic outcome. See “— History of Approved Indications and Active Applications” below.

 

Photodynamic therapy can be a highly selective treatment that targets specific tissues while minimizing damage to normal surrounding tissues. It also can allow for multiple courses of therapy. The most common side effect of photosensitizers that are applied topically or taken systemically is temporary skin sensitivity to bright light. Treatment is generally well tolerated but tingling discomfort or pain is common during PDT. In our Phase III trials, the resulting redness and/or inflammation resolved within 1 to 4 days in most cases; in some cases, however, it persisted for 1 to 2 weeks or even longer. Patients undergoing photodynamic therapy treatments are usually advised to avoid direct sunlight and/or to wear protective clothing and sunscreen for some days after the treatment. Patients’ indoor activities are generally unrestricted except that they are told to avoid bright lights. The degree of selectivity and period of skin photosensitivity varies among different photosensitizers and is also related to the drug dose given. Unless activated by light, photosensitizers have no direct photodynamic therapy effects.

 

History of Approved Indications and Active Applications

 

In December 2011, Ameluz® (“love the light”) 78 mg/g Gel (development name BF-200 ALA) received a centralized European regulatory approval by the European Commission for the treatment of actinic keratosis of mild to moderate severity on the face and scalp. In the EU, Ameluz® is to be used in combination with exposure to a red light source (although the approved labelling does not specify the light source). We launched the commercialization of Ameluz® for the treatment of actinic keratosis in Germany for this indication in February 2012 followed by other EU countries during the following two years.

 

In November 2015, our license partner Louis Widmer SA obtained approval to market Ameluz® in Switzerland for the treatment of actinic keratosis of mild to moderate severity on the face and scalp. In April 2016, our licensee Perrigo Israel Agencies Ltd. obtained approval to market Ameluz® in Israel for the same indication. We launched the commercialization of Ameluz® in Switzerland in April 2016 and in Israel in August 2017.

 

In May 2016, we received approval from the FDA to market in the U.S. Ameluz® in combination with photodynamic therapy using our BF-RhodoLED® lamp for lesion-directed and field-directed treatment of actinic keratoses of mild-to-moderate severity on the face and scalp. Thus, in the U.S., Ameluz® is to be used in combination with exposure to light using our BF-RhodoLED® lamp. We launched the commercialization of Ameluz® and BF-RhodoLED® for the treatment actinic keratosis in the U.S. in October 2016.

 

In September 2016, the European Commission approved Ameluz® for the photodynamic therapy treatment of field cancerization following a prior recommendation of the EMA. This decision was based on a field-directed Phase III trial during which the skin rejuvenating effects of Ameluz® were also studied. The skin rejuvenation results of this trial are included in the authorized EU product information and are summarized in the table entitled “Table 3: Skin quality parameters in the treated area during 12-month follow-up” in the section “Research and Development and Regulatory Affairs — Ameluz® — Trial 3” below. We launched the commercialization of Ameluz® for the photodynamic therapy treatment of field cancerization in the EU shortly after approval.

 

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We initiated our efforts to extend indications for Ameluz® to include basal cell carcinoma in 2014. We conducted Phase III clinical testing in direct comparison with the European competitor product Metvix®. We completed patient recruitment in May 2015 and the last patient concluded the clinical part of the trial in November 2015. We will have a 5-year follow-up period for all patients, of which 6-month and 12-month data are currently available. We published the results of the trial in January 2016, which demonstrated clinical efficacy of Ameluz® for non-aggressive forms of basal cell carcinoma. In comparison with the competitor product Metvix®, in the clinical trials Ameluz® demonstrated generally higher clearance rates, especially for thicker and nodular carcinomas and significant non-inferiority of the clinical endpoint, which was total patient clearance of all basal cell carcinomas.2 These trial results demonstrated to the EMA that Ameluz® is a viable treatment option for superficial and nodular basal cell carcinoma unsuitable for surgical treatment due to possible treatment-related morbidity and/or poor cosmetic outcome, which resulted in approval of this indication in the EU in January 2017.

 

We are also seeking to extend the approved indications in the EU for Ameluz® to include treatment for actinic keratosis with Ameluz® in combination with daylight photodynamic therapy (i.e., using natural daylight to activate the drug), which we applied for in the second quarter of 2017. We believe that if we obtain this approval, we may increase the market potential of Ameluz® in the EU since Ameluz® could be used without doctor’s office procedures, which procedures can render photodynamic therapy treatment in European markets commercially unattractive due to lack of reimbursement.

 

Actinic keratoses

 

Actinic keratoses are superficial potentially pre-cancerous skin lesions caused by chronic sun exposure that may, if left untreated, develop into a form of potentially life-threatening skin cancer called squamous cell carcinoma. Actinic keratoses typically appear on sun-exposed areas, such as the face, bald scalp, arms or the back of the hands, and are often elevated, flaky, and rough in texture, and appear on the skin as hyperpigmented spots.

 

According to The Skin Cancer Foundation, actinic keratosis is becoming a widespread disease, with more than 58 million people affected in the U.S. According to The Skin Cancer Foundation, if left untreated, up to 1 percent of actinic keratosis lesions develop into squamous cell carcinomas every year. On average, this transformation into squamous cell carcinoma occurs within two years of formation of the initial actinic keratosis lesion.

 

Squamous cell carcinoma is an uncontrolled growth of abnormal cells arising in the squamous cells, which compose most of the skin’s upper layers (the epidermis). Squamous cell carcinoma often appear as scaly red patches, open sores, elevated growths with a central depression, or warts; and they may crust or bleed. They can become disfiguring and sometimes deadly if allowed to grow. According to The Skin Cancer Foundation, squamous cell carcinoma has been the second most common form of skin cancer, but its incidence has been rapidly increasing. According to The Skin Cancer Foundation, more than one million cases of squamous cell carcinoma are diagnosed each year in the U.S., and it has been estimated that as many as 8,800 people die from the disease each year in the U.S. Incidence of the disease has increased by 200 percent in the past three decades in the U.S. and it has recently matched the incidence of basal cell carcinoma in the Medicare fee-for-service population, which had been the most common form of human cancers.

 

Because actinic keratosis can develop into squamous cell carcinomas, actinic keratosis is classified by The European Academy of Dermatology and Venereology and other international treatment guidelines as a tumor that requires treatment, and the international treatment guidelines list photodynamic therapy as the “gold standard” for the removal of actinic keratoses, particularly for patients with large keratotic areas.

 

Actinic keratosis was recognized as an occupational disease by the Federal Ministry of Labor and Social Affairs in Germany in 2013. As a result of such recognition, occupational insurance associations in Germany must cover, for the duration of the patients' lives, the treatment costs of patients who have worked predominantly outdoors for extended periods of time and who meet certain other criteria. In Germany since March 2016, photodynamic therapy has been included as an approved treatment option for occupational actinic keratosis, which means it can be reimbursed by the government.

 

 

2 We demonstrated this outcome through one controlled study. Generally, two controlled studies are necessary to support comparative claims in the marketing of drugs. Therefore, the results of this clinical trial comparing Ameluz® and Metvix® are presented for informational purposes only.

 

 

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Market Overview for Treatment of Actinic Keratosis

 

Actinic keratosis is a disease that is most frequent in the Caucasian, light-skinned population. It has been estimated that actinic keratosis affects up to 10% of the entire Caucasian population worldwide. Only a fraction of these patients are currently being treated. Actinic keratoses are treated using a wide range of methods. The traditional methods of treating actinic keratoses are:

 

·cryotherapy, or the deep freezing of skin;

 

·simple curettage;

 

·self-applied topical prescription products; and

 

·combination of medication with photodynamic therapy.

 

Although any of these methods can be effective, each has limitations and can result in significant side effects.

 

Cryotherapy is non-selective (meaning it cannot target specific tissues but affects all tissues in the area of application), can be painful at the site of freezing, and can cause blistering and loss of skin pigmentation, leaving temporary or permanent white spots. In addition, because there is no standardized treatment protocol, results are not uniform and can depend on the skill or technique of the doctor treating the patient.

 

Topical prescription products, such as 5-fluorouracil cream, or 5-FU, can be irritating and requires twice-a-day application by the patient for approximately 2 to 4 weeks, resulting in inflammation, redness and erosion or rawness of the skin. Following the treatment, up to several weeks of healing may be required. Imiquimod or diclofenac, other topical prescription products, require extended applications of cream, lasting up to 3 or 4 months, during which the skin is often very red and inflamed. Treatment with ingenol mebutate is faster, requiring application for only a few days, but side effects can be long-lasting and this drug has been labeled with a black-box warning by the FDA.

 

Simple curettage is generally most useful for one or a few individual lesions, but not for a large number of lesions, and it leaves permanent scars.

 

European Markets

 

In Europe, most actinic keratosis patients are treated with various available medications, which can be assessed through the number of prescriptions. Throughout Europe, there are more than 2 million prescriptions written per year for actinic keratosis drugs, and the number of prescriptions has been growing by about 10% annually over the past four years. In 2016 in Europe, total sales of prescription drugs to treat actinic keratosis were approximately €120 million, with PDT drugs accounting for approximately €22 million of sales. In Europe, although the total number of cryotherapy or simple curettage treatments for actinic keratosis is not available, we believe that only a small number of patients with actinic keratosis is treated by cryotherapy or simple curettage treatments. We therefore disregard treatment by cryotherapy or simple curettage treatments in the following estimates of European market share. We estimate that approximately 33% of all prescriptions for actinic keratosis drugs in Europe are written in Germany, followed by the UK (15%), France (12%), Italy (12%), Spain (10%) and Switzerland (3%), and the remaining European countries account for approximately 15% of such prescriptions.

 

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In Europe, only a small portion of prescriptions written for drugs to treat actinic keratosis are for PDT drugs: approximately 120,000 prescriptions in 2016, representing sales of €22 million. Thus, in Europe, PDT drugs are prescribed for a relatively low percentage of treatments for actinic keratosis, notwithstanding the fact that clinical trials have demonstrated that photodynamic therapy achieves higher clearance rates compared to other drugs used to treat actinic keratosis. We believe that, in Europe, the extra time and effort required from patients and medical practitioners have historically prevented significant market penetration in the statutory health insurance sector in Europe — a photodynamic therapy treatment requires a patient to visit a medical office for the procedure and requires time from doctors or other medical practitioners to administer it. In Europe, topical prescription product creams are reimbursed by government authorities (or other third party payors) and do not require a medical office based procedure, whereas photodynamic therapy requires a procedure that, to date, is not reimbursed in all markets in Europe. We are also seeking to extend the approved indications in the EU for Ameluz® to include treatment for actinic keratosis with Ameluz® in combination with daylight photodynamic therapy (i.e., using natural daylight to activate the drug), which we applied for in the second quarter of 2017. Daylight PDT eliminates the need for a medical office based procedure and should allow easier reimbursement in Germany, where PDT procedures performed by physicians have not been reviewed or approved for reimbursement by the relevant governmental authorities. As a result, we see the potential for PDT to significantly grow its share of the actinic keratosis treatment market in Europe.

 

In Europe, sales of PDT drugs generally have been growing slightly faster, by about 15% per year, than sales of PDT drugs in the actinic keratosis market, but sales of PDT drugs in Europe still represent less than 6% of all prescriptions for actinic keratosis. This market size may, however, be an underestimation since in many countries in Europe PDT drugs may be sold directly to hospitals and, therefore, are not tracked by market research sources. Since PDT drugs generally have a higher price than the self-applied topical drugs, their percentage of revenues is higher than that of prescription numbers (18.3% vs. 5.7%, respectively).

 

Available PDT drugs for treatment of actinic keratosis in Europe include Ameluz® gel, Metvix® cream, Alacare® adhesive plaster and Luxerm® cream. Metvix® has been on the market in the EU since 2002, and is the most frequently used PDT drug for treatment of actinic keratosis throughout the EU. Metvix® is approved for treatment with a red light source and contains methylesther, which is metabolized to 5-ALA in the tissue, as its active ingredient. As with Ameluz®, in the treatment of actinic keratosis, Metvix is used in a PDT treatment once, and the PDT treatment is repeated after several weeks if residual lesions remain. In our phase III trial, we compared the efficacy of Ameluz® with that of Metvix® and demonstrated the non-inferiority of Ameluz® in the treatment of actinic keratosis.3 Alacare® is a 2x2 cm plaster that has low market share because of its limited size of treatment area. Metvix® has also recently been approved in the EU for use in daylight photodynamic therapy for which it is sold by Galderma under the brand name Luxerm® in Germany and Luxera® in other European countries.

 

 

3 We demonstrated this outcome through one controlled study. Generally, two controlled studies are necessary to support comparative claims in the marketing of drugs. Therefore, the results of this clinical trial comparing Ameluz® and Metvix® are presented for informational purposes only.

 

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Throughout Europe, Metvix® has 74% market share among PDT treatments of actinic keratosis, followed by Ameluz® with 21%, Luxerm® with 3% and Alacare® with 2%. Since commercial launch in Germany (where our sales force has been most active), the market share of Ameluz® in the segment of photodynamic therapy drugs for treatment of actinic keratosis dispensed by German public pharmacies had been over 75%. In recent months, however, our market share has fallen to approximately 60%. We believe this decline resulted primarily from the introduction to the market of the medication Luxerm® in 2016. Using our recently completed Phase III trial, we have filed for label extension in the EU for the treatment of actinic keratosis using Ameluz® and daylight PDT. If the approved indications for Ameluz® are extended to include daylight PDT, an office-based procedure would not longer be required in the EU for PDT treatment using Ameluz® (since the medication can be administered by the patient). We believe that we may obtain approval as early as the first half of 2018, although there is no guarantee that we will receive approval for this label extension. We believe that daylight photodynamic therapy products will play an increasingly important role in Europe in the future and will begin to be prescribed as an alternative to less effective, self-applied, topical prescription product creams (which have historically been market leaders in the EU in treating actinic keratosis).

 

In Spain, the market share of Ameluz® for photodynamic therapy treatment of actinic keratosis has been growing from less than 5% in 2014 to 12% in 2015 and 23% in 2016.

 

 

 

Most of the prescriptions in Europe for treatment of actinic keratosis are for self-applied topical drugs, for which the driver seems to be the minimal amount of time required by doctors and other medical practitioners. Almost half of all drug prescriptions in Europe for the treatment of actinic keratosis are for Solaraze® (45%), which according to a meta-analysis of clinical trials by Vector and Tolley (2014)4 has a rather low efficacy. This reinforces our belief that another driver, such as time required to be spent in consultation as compared to time required for a medical office based procedure, may be more determinative of treatment selection than efficacy. In Europe, Solaraze® prescriptions for actinic keratosis are followed by prescriptions for Aldara® (18%), Picato® (16%) and Actikerall® (7%).

 

U.S. Market

 

The market for the treatment of actinic keratosis in the U.S. differs significantly from the European market. We believe this is because the U.S. reimbursement system generally has favored procedures, for which doctors in Europe may not get paid or reimbursed. In the U.S., the most common treatment for actinic keratosis is cryotherapy. In 2013, Medicare alone paid for 5.977 million actinic keratosis patients to be treated with cryotherapy. This number of patients so treated had been growing by 2-3% per year since 2008. We estimate that, if the number of patients so treated is extrapolated to 2016 with an assumed 2% growth rate, approximately 6.4 million Medicare patients with actinic keratosis were treated with cryotherapy in 2016. An analysis of “National Ambulatory Medical Care Survey” and “Medicare Current Beneficiary Survey” data with respect to the frequency and cost of actinic keratosis treatment concluded that about 60% of actinic keratosis patients were covered by Medicare, and 40% of treatments were reimbursed by private payers during the period from 1998 through 2000 (Dermatology Surgery 2006;32(8):1045-9). Thus, we assume that the above number of cryotherapies for Medicare patients represents only 60% of all cryotherapy treatments performed in the U.S. in the relevant year, so the number of cryotherapies for medicare patients should be divided by 0.6 in order to estimate the total number of cryotherapy treatments in the U.S. in that year. Simple curettage is generally not used to treat actinic keratosis in the U.S.

 

 

4 This research was funded by Biofrontera AG. Our personnel commented on the draft manuscript but did not have control of the methodology, conduct, results, or conclusion of this study. Additionally, this paper was not dependent on our approval for submission to the PLoS One journal.

 

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In the U.S., Levulan® is approved for use in combination with PDT with a blue light source. Levulan® contains 5-aminolevulinic acid (5-ALA) as its active ingredient. As with Ameluz®, in the treatment of actinic keratosis, Levulan® is used in a PDT treatment once, and the PDT treatment is repeated after several weeks if residual lesions remain. Sun Pharma has reported annual revenue of $136 million from its sales of Levulan® in 2016. Assuming an approximate annual average sales price of $309 per Levulan® Kerastick, we estimate such sales represents approximately 343,000 prescriptions.

 

We estimate that there were an additional 1.65 million prescriptions for self-applied topical drugs in the U.S. for the treatment of actinic keratosis in 2016. These prescriptions are for various topical products, with the most frequently prescribed ones being drugs with the active ingredient 5-fluorouracil (44% generic plus 4% branded), followed by imiquimod drugs (31%), diclofenac drugs (16%) and ingenol mebutate drugs (5.5%).

 

In 2016, the cryotherapy treatments and the topical products (including PDT drugs) in the aggregate constituted an estimated 12.6 million treatments for actinic keratosis in the U.S. According to these numbers, PDT was only applied in about 3% of all actinic keratosis treatments in the U.S., and, therefore, we believe there is substantial market potential and room for growth in the U.S. Some of our estimates and judgments are based on various sources which we have not independently verified and which potentially include outdated information, or information that may not be precise or correct, potentially rendering the U.S. market size for treatment of actinic keratosis with Ameluz® smaller than we have estimated, which may reduce our potential and ability to increase sales of Ameluz® and revenue in the U.S. Although we have not independently verified the data obtained from these sources, we believe that this data provides the best available information relating to the present market for actinic keratosis treatments in the U.S., and we often use these data for our business and planning purposes. We are responsible for the inclusion of these data in this prospectus.

 

 

The chart above displays the number of drug prescriptions and treatments for actinic keratosis in the U.S during 2014-2016 by: (i) cryotherapy, reimbursed by Medicare (Source: Resource-Based Relative Value Scale (RBRVS) of the American Medical Association); (ii) cryotherapy, not reimbursed by Medicare (the remaining 40% of cryotherapies) (Source: Dermatology Surgery 2006; 32(8):1045-9); (iii) self-applied topical drugs (Source: Biofrontera’s internal market research); and (iv) Levulan® (Source: Sun Pharma’s annual reports). The chart below shows the relative percentages of these actinic keratosis treatments in 2016 in the U.S.

 

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We believe our opportunities in the U.S. market for Ameluz® sales growth for treatment of actinic keratosis are to replace Levulan® Kerastick as the leading PDT product in the current PDT market sector for actinic keratosis treatment and to expand the PDT market as a first-option therapy to treat actinic keratosis as compared to cryotherapy and self-applied topical products.

 

Basal Cell Carcinoma

 

Basal cell carcinomas are abnormal, uncontrolled growths or lesions that arise in the skin’s basal cells, which line the deepest layer of the epidermis (the outermost layer of the skin). Basal cell carcinomas often appear as open sores, red patches, pink growths, shiny bumps or scars and are typically caused by accumulated sun exposure.

 

Basal cell carcinomas are the most common invasive tumors affecting humans, accounting for approximately 80 percent of all non-melanoma skin cancers worldwide. Studies of populations in the U.S. and Switzerland have shown that approximately 20 to 30 percent of Caucasians will develop at least one basal cell carcinoma in their lifetime, and cases are increasing worldwide, which is believed to be caused by increased exposure to ultraviolet light. More than 4 million cases of basal cell carcinoma are diagnosed in the U.S. each year. Although basal cell carcinoma rarely spreads to other parts of the body and becomes life-threatening, it can be disfiguring if not treated promptly.

 

Market Overview for Treatment of Basal Cell Carcinoma

 

The most common treatment for basal cell carcinoma in the EU and U.S. is surgical removal. In many European countries, dermatology specialists are hospital-based and, as a result, basal cell carcinoma is most commonly treated by hospital surgery in such European countries, which is rarely the case for actinic keratosis. The treatment of basal cell carcinoma by a surgical procedure can result in high costs and clearly visible scarring. But thin, non-aggressive basal cell carcinomas can also be treated with photodynamic therapy. The advantage of treating basal cell carcinoma with photodynamic therapy is that it is a non-invasive alternative that can have better cosmetic results, i.e., removal of tumors without leaving clearly visible scarring.

 

According to a market study published in 2014 by Technavio, the international market for actinic keratosis medication is expected to grow by approximately 8% annually, from approximately $546 million in 2013 to approximately $942 million in 2020. During this same period, the global market for basal cell carcinoma medication is expected to grow from approximately $236 million in 2013 to nearly $5 billion in 2020, because of the availability of new drugs (such as Ameluz®), which would likely mean that fewer patients will undergo surgery for treatment of basal cell carcinoma.

 

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BF-RhodoLED® Lamp

 

Our BF-RhodoLED® is a red light lamp specifically designed for photodynamic therapy, and uses LEDs emitting red light at a wavelength of approximately 635 nm to activate the photosensitizer. We believe light emitted at this wavelength is effective for photodynamic therapy illumination with Ameluz® or other medications containing ALA or methyl ALA. The red light emitted by our BF-RhodoLED® lamp is outside the infrared range, reducing the likelihood for discomfort from warming. Other light wavelengths, including the blue range, can also activate the photosensitizer, but penetrate less deeply into tissues as compared to red light. We manufacture our BF-RhodoLED® lamp at our corporate headquarters in Leverkusen, Germany.

 

We believe our BF-RhodoLED® lamp combines a controlled and consistent emission of light at the required wavelength with simplicity of design, user-friendliness and energy efficiency. Our BF-RhodoLED® lamp contains a fan used to blow air over the treated skin surface and power settings for the fan. In the model used in the EU, our lamp also allows adjustment of the light intensity during photodynamic therapy in order to reduce any discomfort experienced during the treatment. Our BF-RhodoLED® lamp has been CE-certified since November 2012 and is currently distributed throughout the EU. Our lamp is approved in the U.S. by the FDA as a combination product for use in treatment with Ameluz®.

 

We have been performing the final assembly of our BF-RhodoLED® lamp at our facilities in Leverkusen, Germany since July 2016 and, thus, we are considered the responsible manufacturer by the FDA.

 

History of Clinical Trials for Ameluz® and BF-RhodoLED® Lamp

 

Clinical trials relating to treatment of actinic keratosis with Ameluz® photodynamic therapy

 

The initial two Phase III trials we conducted in connection with obtaining approval for Ameluz® in the EU included a variety of CE marked photodynamic therapy light sources, and best results were achieved with LED lamps. The efficacy of Ameluz® was tested in comparison with Metvix®, the approved standard medication already available in the EU, that is also a topical cream used in connection with photodynamic therapy. The results of the trial demonstrated that Ameluz® was significantly non-inferior to Metvix® for the treatment of actinic keratoses with photodynamic therapy. The complete clearance rates of patients from all keratoses at the average of all lamp types were 78 percent for Ameluz® and 64 percent for Metvix®. With LED lamps only, the clearance rates increased to 85 percent for Ameluz® and 68 percent for Metvix®. The side-effect profiles were comparable for both products. In another trial, using Ameluz® with LED lamps completely removed all keratoses in 87 percent of the patients. For the individual lesions, 96 percent and 94 percent were completely eradicated in the two trials using LED lamps (all values cited are from the intent to treat, or ITT, population). See “Research and Development and Regulatory Affairs-Ameluz® Actinic Keratosis-Trial 1 and —Trial 2”.

 

Prior to obtaining approval in the U.S. for treatment of actinic keratoses using Ameluz® photodynamic therapy, the FDA requested two Phase I clinical trials for Ameluz®, one to determine the plasma concentration of the drug after application of an entire tube of Ameluz® to maximally damaged skin, the other to investigate a sensitizing effect of the product. These Phase I trials were performed with approximately 240 subjects and were completed in 2015.

 

A maximal use pharmacokinetics study was conducted in 12 patients bearing at least 10 mild to moderate actinic keratoses on the face or forehead. An entire tube of vehicle and Ameluz® followed by photodynamic therapy was applied in a fixed sequence design with a washout period of 7 days to evaluate baseline and Ameluz® dependent plasma concentrations of aminolevulinic acid, or ALA, and protoporphyrine IX, or PpIX. An up to 2.5-fold increase of basic ALA plasma concentrations was observed during the first three hours after Ameluz® application, still remaining within the normal range of previously reported and published endogenous ALA concentrations. The plasma concentrations of metabolite PpIX were generally low in all patients, and in none of the patients, was an obvious increase of PpIX plasma concentrations observed after Ameluz® application.

 

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In a clinical trial designed to investigate the sensitization potential of ALA with 216 healthy subjects, 13 subjects (6 percent) developed allergic contact dermatitis after continuous exposure for 21 days with doses of ALA that were higher than doses normally used in the treatment of actinic keratosis. Allergic contact dermatitis was not observed under regular treatment conditions.

 

Approval of photodynamic therapy treatment of actinic keratoses in the U.S. required us to obtain a combination approval of both Ameluz® and the light source. As a result, we developed our own photodynamic therapy lamp, the BF-RhodoLED®. Our photodynamic therapy lamp is CE-certified in the EU, which required the company to be certified pursuant to the ISO 9001 and ISO 13485 standards.

 

In preparation for seeking FDA approval in the U.S., we conducted a Phase III trial using the combination of Ameluz® and our BF-RhodoLED® lamp. In this Phase III trial, completed in 2015, with this combination treatment, all keratoses of a patient were completely eradicated in 91 percent of patients, and 94 percent of all lesions were completely removed (99.1 percent of mild lesions and 91.7 percent of moderate lesions). Further, 63.3 percent of the patients who were initially completely asymptomatic were still asymptomatic one year later. In this Phase III trial, the drug was applied over large skin areas (field therapy) for the first time in a Phase III trial of photodynamic therapy. Field directed treatment is advisable if a patient has several actinic keratosis lesions in close proximity since multiple actinic keratoses are believed to arise from “cancerized fields,” i.e., skin areas in which neoplastic cells are spread over a larger area, and additional subclinical (not yet visible) lesions may exist in the same field. Based on this study, the EU granted Ameluz® the approval for the indication “field cancerization”, and the prescribing information in the U.S. specifically approves the field directed approach. See “Research and Development and Regulatory Affairs-Actinic Keratosis-Ameluz®-Trial 3”.

 

By testing larger skin areas, we could also investigate the effect of photodynamic therapy on photo-damaged skin. Thus, in this field directed Phase III trial for Ameluz®, we measured the improvement of previously existing skin impairment. Based on the parameters we tested for skin impairment, the patients with the treatment showed improvements as a result of the treatment. The proportion of patients with impaired skin surface, including rough, dry and scaly skin, decreased from 85 percent to 28 percent within 12 months after treatment with Ameluz®. Patients with skin hyperpigmentation or hypopigmentation decreased from 59 percent to 24 percent and from 46 percent to 11 percent, respectively. The proportion of patients with mottled pigmentation, mixed hyperpigmentation and hypopigmentation, decreased from 48 percent to 18 percent. Before treatment, 26 percent of the patients had mild to moderate/severe scarring, this decreased to 7 percent of patients after treatment. Atrophic skin was diagnosed in 31 percent before but only in 4 percent of patients 12 months after treatment. See table 3 under See “Research and Development and Regulatory Affairs-Ameluz®-Actinic Keratosis-Trial 3”. These skin improvement results are now included in our official EU product information for Ameluz®.

 

Clinical trials relating to treatment of basal cell carcinoma with Ameluz® photodynamic therapy

 

To extend the EU approval for Ameluz® to the treatment of basal cell carcinoma, we conducted another Phase III trial. A total of 281 patients with 1 to 3 non-aggressive basal cell carcinomas enrolled in this Phase III trial, of which 138 were treated with Ameluz® PDT. We conducted the trial under the clinical supervision of Prof. Colin Morton (UK) and Prof. Markus Szeimies (Germany) at 27 clinical trial centers in the UK and Germany. The comparative trial tested Ameluz® side by side with its major European competitor Metvix®, which was already approved in the EU for the treatment of basal cell carcinoma. Patient recruitment lasted until May 2015, the last patient completed the trial in November 2015, and we obtained results of the trial in January 2016. Non-aggressive basal cell carcinomas with a thickness of up to 2 mm were included in the trial.

 

Photodynamic therapy treatment with Ameluz® completely eliminated all of a patient’s non-aggressive (superficial and nodular) basal cell carcinomas in 93.4 percent of cases, compared to 91.8 percent from photodynamic therapy treatment with Metvix®. Of the individual lesions, 94.6 percent were completely eliminated after Ameluz® treatment, 92.9 percent were completely eliminated after Metvix® treatment. Greater differences were observed in the case of thicker basal cell carcinomas. In photodynamic therapy treatment with Ameluz®, 89.3 percent of the nodular carcinomas were completely removed, compared to only 78.6 percent with Metvix®. Superficial basal cell carcinoma lesions were completely eradicated by photodynamic therapy treatment with Ameluz® in 95.8 percent of patients, compared to photodynamic therapy treatment with Metvix®, in which superficial basal cell carcinoma lesions were completely eradicated in 96.9 percent of the cases. After 12 months, recurrence rates were slightly higher for patients treated with Metvix® as compared to patients treated with Ameluz®. In the Ameluz® group, 6.7 percent of the lesions were recurrent after 12 months, and in the Metvix® group 8.2 percent of the lesions were recurrent after 12 months. See table 4 under “Research and Development and Regulatory Affairs-Ameluz®-Basal Cell Carcinoma”.

 

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In July 2016, Biofrontera applied to the EMA for approval for the photodynamic therapy treatment of basal cell carcinoma with Ameluz® based on the results of this Phase III trial. The approval was granted by the European Commission in January 2017.

 

Clinical trials relating to treatment of actinic keratosis with daylight photodynamic therapy

 

Between June and September 2016, we conducted a Phase III trial to evaluate the safety and efficacy of Ameluz® in combination with daylight photodynamic therapy, or daylight PDT, for the treatment of mild to moderate actinic keratosis. In the trial, Ameluz® was compared to Metvix®, which had previously obtained approval for daylight photodynamic therapy in some European countries. The intra-individual, randomized, observer-blinded, multi-center study took place at 7 sites in Spain and Germany, and evaluated a total of 52 patients, each with 3 to 9 mild to moderate actinic keratosis lesions in each of two comparable treatment areas on the face and/or scalp. For an intra-patient comparison of the treatments, each patient received daylight photodynamic therapy with Ameluz®, on one side, and Metvix®, on the other side, of the face or scalp.

 

The Phase III trial met its primary endpoint, exhibiting after a single treatment with daylight photodynamic therapy a total lesion clearance rate (percentage of completely cleared individual lesions per patient’s side) of 79.8 percent for the areas treated with Ameluz®, which demonstrated non-inferiority to treatment with Metvix®, in which 76.5 percent of lesions were fully cleared after one daylight photodynamic therapy (p<0.0001). Histological evaluation of lesion clearance resulted in a similar outcome, with 72.5 percent versus 66.7 percent of lesions fully cleared after treatment with Ameluz® and Metvix®, respectively, in combination with daylight photodynamic therapy.

 

In the Phase III trial, the secondary endpoints for treatment with Ameluz® in combination with daylight photodynamic therapy compared favorably with Metvix® and showed equivalent or better clearance rates. After a single daylight photodynamic therapy with Ameluz®, 85 percent of lesions on the face were fully cleared, and 72 percent of the more difficult to treat lesions on the scalp were fully cleared. After a single daylight photodynamic therapy with Metvix®, 84 percent of the lesions on the face were fully cleared and 65 percent of the lesions on the scalp were fully cleared. The treatment of moderate actinic keratosis lesions resulted in full clearance of 76 percent of the lesions treated with Ameluz® in combination with daylight photodynamic therapy, compared to 73 percent cleared by treatment with Metvix® in combination with daylight photodynamic therapy. Mild actinic keratosis lesions had a clearance rate of 94 percent after treatment with Ameluz® in combination with daylight photodynamic therapy compared to 91 percent after treatment with Metvix® in combination with daylight photodynamic therapy. Lesions in patients with five or fewer actinic keratoses were fully cleared in 83 percent of cases after treatment with Ameluz® in combination with daylight photodynamic therapy and in 81 percent of cases after treatment with Metvix® in combination with daylight photodynamic therapy. In patients with more than 5 actinic keratoses, 75.2 percent of lesions were fully cleared after treatment with Ameluz® in combination with daylight photodynamic therapy, while 77.6 percent of lesions were fully cleared after treatment with Metvix® in combination with daylight photodynamic therapy.

 

In this Phase III trial, the most notable differences between Ameluz® and Metvix® clearance rates depended on the patient’s age and the weather conditions. In patients younger than 65 years of age, the lesion clearance rate was 83 percent after treatment with Ameluz® in combination with daylight photodynamic therapy compared to a lesion clearance rate of 74 percent after treatment with Metvix® in combination with daylight photodynamic therapy. For patients treated with daylight photodynamic therapy during cloudy weather, the lesion clearance rate was 75 percent after treatment with Ameluz® compared to a lesion clearance rate of 66 percent after treatment with Metvix®. For patients treated with daylight photodynamic therapy during sunny weather, lesion clearance rates improved to 85 percent after treatment with Ameluz® and 83 percent after treatment with Metvix®. See “Research and Development and Regulatory Affairs-Ameluz®-Actinic Keratosis with daylight photodynamic therapy”.

 

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There were no notable differences between Ameluz® and Metvix® in side effects in this Phase III trial. Furthermore, pain during the daylight photodynamic therapy illumination was rated by the patients on a scale of 0 (no pain) to 10 (very severe pain). The mean pain scale for Ameluz® was 1.2 and for Metvix® was 1.1.

 

We used these results to file, in the second quarter of 2017, for label extension in the EU for the treatment of actinic keratosis using Ameluz® in combination with daylight photodynamic therapy.

 

Our Research and Development Programs

 

In addition to our approved products, we also have several research and development programs.

 

Current Clinical Trials for Ameluz®

 

Basal Cell Carcinoma

 

In August 2017, we agreed with the FDA on the requirements necessary to obtain approval for our application of Ameluz® PDT for the treatment of superficial basal cell carcinoma in the U.S. Under the agreed plan with the FDA, our application could be based on a single additional phase III placebo-controlled pivotal trial to be conducted in the U.S., in which Ameluz® PDT will be compared to placebo PDT, which can be conducted with relatively few patients minimizing both time and expense. We will be required to present a combined read-out of clinical and histological clearance. In December 2017, we filed an investigational new drug application with the FDA for our proposed phase III study protocol to evaluate Ameluz® PDT for the treatment of superficial basal cell carcinoma. This investigational new drug application enables us to initiate our phase III trial to be conducted in the U.S. to compare Ameluz® PDT to placebo PDT.

 

In connection with this application, we are planning a study with the following design. The primary objective will be to compare the efficacy of Ameluz® PDT with PDT using just the vehicle that is used to deliver the active ingredient in Ameluz®, in combination with BF-RhodoLED® illumination, in the treatment of superficial basal cell carcinoma. A randomized, double blind, vehicle-controlled multicenter phase III study will be performed to evaluate the safety and efficacy of Ameluz® in combination with BF-RhodoLED®. We plan to work with 10 to 11 clinical centers in the U.S., and enroll 120 patients in order to achieve an alpha level of p<0.001. Ameluz® and placebo will be applied at a 3:1 ratio. The primary efficacy variable is the composite clinical and histological complete clearance rate of the patient’s main target lesion, assessed at the end of the clinical observation period, 12 weeks after the start of the first or second PDT cycle. Each PDT cycle will consist of two PDTs one to two weeks apart. Secondary objectives will include the evaluation of the safety and secondary efficacy parameters (including stratification according to lesion size, location, patient age and sex) related to Ameluz® and BF-RhodoLED®, also including clinical clearance of additional treated lesions on the same patients. The double blind clinical observation period for each patient will be up to 6.5 months (up to two weeks screening and pre-randomization period, and three or six months double blind part of the study) followed by a 2-year follow-up period after the start of the last PDT cycle. The recruitment phase is expected to start in the second quarter of 2018 and last for six to nine months. We may revise the design of this study based on our further discussions with the FDA.

 

Field-Directed Treatment of Actinic Keratosis on the Extremities and the Trunk

 

We have initiated a double blind, placebo controlled, intra-individual phase III trial at 4 clinical centers in Germany investigating the field-directed treatment of actinic keratosis on the extremities and the trunk with Ameluz®. The primary clinical endpoint of this trial is total patient clearance of all actinic keratosis. Secondary endpoints include total lesion clearance, other efficacy variables and safety endpoints. All endpoints will be stratified by lesion and patient subgroups, including lesion severity, lesion location and patient sex and age. The trial will seek to enroll 52 patients. As of November 2017, 6 potential patients had been screened, and 3 had been randomized. We originally planned to complete recruitment within 6 months, but initial randomization speed is lower than we expected. As a result, recruitment may not be complete until the third quarter of 2018. We are currently considering the addition of more clinical centers to accelerate recruitment. The clinical portion of the study is scheduled to end approximately 9 months after recruitment of the last patient. The clinical part of the study will be followed by a 1-year follow up, which will be reported separately.

 

Preparation of Additional Clinical Trials for Ameluz®

 

We have started preparation for the following phase III trials:

(i)Squamous cell carcinoma: We are planning a randomized, double-blind, multi-center phase III study to evaluate the safety and efficacy of Ameluz® versus placebo in the treatment of Bowen’s disease (squamous cell carcinoma in situ) with photodynamic therapy when using the BF-RhodoLED® lamp. The study is expected to have an inter-individual design similar in treatment regime and patient number to our planned trial for the treatment of superficial basal cell carcinoma in the U.S., as described above under “— Current Clinical Trials for Ameluz — Basal Cell Carcinoma.” The primary clinical endpoint will be total clearance of all of a patient’s lesions. A 2-year follow-up is planned for this trial.
(ii)Larger treatment area: We are planning a randomized, double-blind, intra-individual, multi-center phase III study to evaluate the safety and efficacy of Ameluz® at an application thickness of 1 mm versus application of a thin layer of Ameluz® in the treatment of mild to severe actinic keratosis on the face and/or scalp with photodynamic therapy when using the BF-RhodoLED® lamp. The primary clinical endpoint will be the pairwise comparison of the percentage of cleared lesions on both sides of patients. The trial is expected to enroll 52 patients and will include a 1-year follow-up.
(iii)Acne: This phase III trial is in the early planning stages. No trial design has been defined, and we are currently collecting information of investigators with off-label experience in this indication.

 

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These studies have been discussed with clinical centers in Germany, and study synopses have been written and agreed upon with investigators. We delayed these trials after our discussion with the FDA regarding our phase III trial to be conducted in conjunction with our application for approval of Ameluz® PDT to treat superficial basal cell carcinoma in the U.S. and during preparation of that trial. Once we have received the FDA’s responses to our proposed basal cell carcinoma study protocol (which we expect to receive in the first quarter of 2018), we will determine the timeline and manner for continuing the phase III trials listed above, which will also depend on availability of sufficient funds.

 

BF-derm1

 

BF-derm1 is a drug candidate we have been developing in the form of a tablet for the treatment of severe, chronic, antihistamine-resistant urticaria, or hives. In its most severe and chronic form, this illness cannot be treated adequately using currently available drugs. The BF-derm1 tablet contains an active ingredient that covalently binds to histidine decarboxylase that we believe to be a novel mechanism of action to soothe chronic urticarial (hives). The project is currently not being actively developed. Since we expect to focus on further commercializing Ameluz® PDT in the next several years, we intend to seek a partner for the further development and funding of the Phase III costs and regulatory approval expenses relating to developing BF-derm1.

 

BF-1

 

Our BF-1 candidate involves a patented active ingredient that is intended to be used for the prophylactic treatment of patients who frequently suffer from migraines. We have conducted preclinical investigations concerning the tissue distribution, metabolism and toxicology of the substance. We have further conducted a Phase 0 trial involving humans in which the substance was orally administered to healthy subjects, demonstrating favorable bioavailability and pharmacokinetics of the active agent. Since these trials did not yield any critical findings, we believe further tests on humans should be conducted. Because this product candidate no longer fits our dermatological product focus, we are not actively developing it, but we intend to explore licensing opportunities.

 

Our Development Collaboration with Maruho

 

In July 2016, we entered into a collaboration and partnership agreement with Maruho, a pharmaceutical company based in Japan specializing in dermatology that is also an affiliate of Maruho Deutschland GmbH, a major shareholder of our company. This agreement provides for the joint development of up to four branded generic pharmaceutical product candidates for the European market using our proprietary formulation technology. The current agreement covers the initial part of the collaboration, in which the feasibility of the product development is tested, which we expect to be completed by the end of 2017. Under this agreement, Maruho will bear all the costs connected with the development of these pharmaceutical product candidates (subject to a cap of €2.3 million).

 

If these product candidates progress to clinical development, the collaboration and partnership agreement provides that we will negotiate in good faith a new agreement with Maruho, without any obligation to enter into it. Maruho has not been granted any rights to our formulation technology in the first phase of the project. The collaboration and partnership agreement provides that, if the parties ultimately determine to enter into a new agreement, Biofrontera would be granted an exclusive sublicensable right to market the product in Europe. As the agreement is related to Europe only, there are currently no firm understandings with respect to other geographical regions. The collaboration and partnership agreement further specifies that all results, information and data developed during the term of such agreement will be the property of Maruho. Any intellectual property (such as trade secrets, copyrights, patents and other patent rights, trademarks and moral rights) developed during the term of such agreement will be the joint property of us and Maruho. We do not currently expect any such intellectual property to be developed during the term of the agreement. The collaboration and partnership agreement prohibits us from manufacturing, selling or otherwise dealing in any products similar to and competitive with the product candidates developed under the agreement without Maruho's consent. Maruho has the right to terminate the collaboration and partnership agreement for any or no reason. We believe that these development projects will not yield any products for commercial launch before 2020.

 

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Our Cosmetic Skin Care Products — Belixos®

 

Our Belixos® line is our over-the-counter line of skin care cosmetics products developed by us to help moisturize and soothe dry, itchy and irritated or sun-damaged skin. Our Belixos® cosmetic products are available for sale in Germany and certain other European countries at selected pharmacies, dermatological institutes, and through local Amazon websites. These cosmetic products are not currently available for sale in the U.S.

 

Sales, marketing and distribution

 

We are currently selling Ameluz® in the U.S., in 11 countries in Europe and in Israel.

 

Sales, marketing and distribution in Europe and Israel

 

With its central European approval, Ameluz® for the photodynamic therapy treatment of actinic keratosis and basal cell carcinoma, can be sold and distributed in all EU countries as well as in Norway, Iceland, and Liechtenstein. We have marketed and sold Ameluz® to dermatologists in Germany and, since March 2015, also in Spain through our own field sales force. We sell Ameluz® in other countries within the European Union, in Switzerland and in Israel through license partners.

 

In many European countries, the price and the medical reimbursement status have to be defined prior to market launch, which can be a lengthy process. To date, in Europe our company or our license partners have commenced sales in Germany, Spain, Austria, the Netherlands, Luxembourg, Belgium, Denmark, Sweden, Norway, the UK and Switzerland. The medication is available in these countries at a pharmacy retail price of between approximately €150 – €270 per 2 gram tube.

 

In the EU, distribution to public pharmacies generally takes place via pharmaceutical wholesalers, whereas hospital pharmacies may also be supplied directly. In addition to regular visits by our field sales force to dermatologists, we have since launch presented Ameluz® at major dermatological conferences both in Germany and in other European countries.

 

We have a license and supply agreement with Desitin Arzneimittel GmbH to market and sell Ameluz® and the BF-RhodoLED lamp in Denmark, Sweden, and Norway; and we have a license and supply agreement with Pelpharma Handels GmbH to market and sell Ameluz® and the BF-RhodoLED lamp in Austria.

 

We terminated a marketing collaboration agreement with Spirit Healthcare Limited to market Ameluz® in the UK and Ireland in July 2015.

 

On September 13, 2017, we terminated our license and supply agreement with BiPharma B.V., effective as of October 31, 2017.

 

We initially marketed and sold Ameluz® in Spain pursuant to an agreement with Allergan SA. After termination of this agreement, since March 2015 we have marketed and sold our products in Spain through our branch, Biofrontera Pharma GmbH sucursal en España.

 

We have a license and supply agreement with Louis Widmer SA in which we have granted a distribution license for Ameluz® and the BF-RhodoLED lamp in Switzerland and Liechtenstein. We have a license and supply agreement with Perrigo Israel Agencies Ltd. in which we have granted a distribution license for Ameluz® and the BF-RhodoLED lamp in Israel, the West Bank and the Gaza Strip. In these regions, the licensees were required to obtain independent regulatory approvals in collaboration with Biofrontera. In Switzerland, the regulatory approvals for Ameluz® and reimbursement were issued in December 2015 and commercial launch commenced in the beginning of 2016. In Israel, regulatory approval for Ameluz® was granted by the Israeli health agency in April 2016, reimbursement for treatment with Ameluz® of immunosuppressed patients was subsequently granted. We commenced sales in Israel in July 2017.

 

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In these agreements with our sales partners the sales partners purchase Ameluz® from us at a price that is linked to their own anticipated sales price. Our share of the sales price varies, depending on market conditions within each country or region, range from 35% to 60% of net revenue.

 

Sales, marketing and distribution in the U.S.

 

We decided to market and sell Ameluz® in combination with BF-RhodoLED® for the treatment of actinic keratosis in the U.S. with our own sales force, and launched the commercialization of Ameluz® and BF-RhodoLED® for actinic keratosis in October 2016. Prior to launch, and with the help of a consulting firm specializing in market access, we analyzed the reimbursement mechanisms for photodynamic therapy in the U.S. healthcare system. Ameluz® is distributed as a buy-and-bill drug that is purchased by the dermatologist, rather than distribution through pharmacies.

 

Sales in the U.S. are made through our wholly-owned subsidiary, Biofrontera Inc., a Delaware corporation, which we established in March 2015. Based on our experience, we concluded that we could most effectively market our products in the U.S. by using our own sales force, which we can train to sell our drug Ameluz® in combination with the BF-RhodoLED® lamp and related procedure. During 2016, we hired 26 employees for our U.S. marketing and sales efforts, and we launched the commercialization of Ameluz® and BF-RhodoLED® for actinic keratosis in the U.S. in October 2016. We have filled the key positions for our U.S. operations with qualified and experienced employees, and we expect to continue to fill positions and build our field sales force for the market. Several of our employees have joined us from competitors and, as a result, have specific experience with the photodynamic therapy market sector, including experience in selling medication as a buy-and-bill combination product. This is particularly helpful to us because, in the U.S., we sell Ameluz® in combination with our BF-RhodoLED® photodynamic therapy lamp.

 

Group structure

 

The Biofrontera group consists of a parent company, Biofrontera AG, and five wholly-owned subsidiaries, Biofrontera Bioscience GmbH, Biofrontera Pharma GmbH, Biofrontera Development GmbH, Biofrontera Neuroscience GmbH and Biofrontera Inc. All companies are based at Hemmelrather Weg 201, 51377 Leverkusen, Germany, except Biofrontera Inc., which is based at 201 Edgewater Dr., Wakefield, Massachusetts 01880, U.S.

 

Biofrontera AG is a holding company that leads financing activities for the group. Its subsidiary Biofrontera Bioscience GmbH has responsibility for research and development activities for the group and holds our patents and approvals for Ameluz®. Pursuant to a license agreement with Biofrontera Bioscience GmbH, our subsidiary Biofrontera Pharma GmbH is responsible for the manufacturing and further licensing and marketing of our approved products.

 

We established Biofrontera Development GmbH and Biofrontera Neuroscience GmbH in December 2012 as additional wholly owned subsidiaries of Biofrontera AG. The purpose of these subsidiaries is to pursue the further development of pipeline products that are not part of our core business. To this end, in December 2012, Biofrontera AG purchased two projects, BF-derm1 and BF-1, from Biofrontera Bioscience GmbH pursuant to purchase and transfer agreements, and then transferred the projects to the two new subsidiaries, with the contribution agreement being effective from December 31, 2012. The product candidate BF-derm1, which we intend to develop as a treatment for severe chronic urticarial (hives), is the responsibility of Biofrontera Development GmbH, while the product candidate BF-1, which we intend to develop as a prophylactic treatment for migraines, is the responsibility of Biofrontera Neuroscience GmbH. Although we are not developing these two product candidates at this time, if we chose to develop them in the future we believe this corporate structure will better allow us to finance such development.

 

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We established Biofrontera Inc., a Delaware corporation, as a wholly-owned subsidiary, with a headquarters in Wakefield, Massachusetts to pursue our business and commercialization efforts in the U.S. under a license from our wholly-owned subsidiary Biofrontera Pharma GmbH.

 

Research and Development and Regulatory Affairs

 

Ameluz®

 

To date, we have focused our research and development efforts on Ameluz® in order to try to optimize its market potential. We have advanced our Ameluz® development program through additional clinical trials with the goal of extending approved indications and achieving better market positioning.

 

We have conducted three Phase III trials for Ameluz®. Two of them, trials CT002 and CT003, including 12-month follow-up studies, were used to apply for the centralized European marketing approval with the EMA. The third Phase III trial, CT007, was conducted to test Ameluz® for use in combination with our own light source, the BF-RhodoLED® lamp, as well as testing for field cancerization therapy. In September 2010, we submitted the dossier for Ameluz® for the treatment of actinic keratosis to the EMA for centralized EU approval, and obtained marketing approval in December 2011. In July 2015, we filed an NDA with the FDA for Ameluz® and our BF-RhodoLED®. In May 2016, we received approval from the FDA to market in the U.S. Ameluz® in combination with photodynamic therapy using our BF-RhodoLED® lamp for lesion-directed and field-directed treatment of actinic keratoses of mild-to-moderate severity on the face and scalp.

 

The summary of clinical trials below discusses confidence intervals in relation to those trials. For clinical endpoints that are binary (i.e., the specified endpoint either is observed or not observed with respect to a patient), the result of a trial is a single number describing the percentage of patients reaching the endpoint. An example of this type of endpoint is total patient clearance, where patients are observed either to reach total clearance or not to do so. Total patient clearance is the primary endpoint in most of our trials. When the clinical endpoint is binary, there is no specific numerical result associated with individual patients, which does not give rise to a confidence interval for the results of the trial. In order to establish a confidence interval for such a trial, statisticians assume a binominal distribution, which forms the basis for the confidence interval. For a trial design where observation of the primary endpoint yields a quantifiable value for each patient, a confidence interval naturally arises from the results of the trial. For example, the primary clinical endpoint for our trial studying the safety and efficacy of Ameluz® in combination with daylight photodynamic therapy for the treatment of mild to moderate actinic keratosis was the pairwise comparison of the percentage of fully cleared lesions on each side of a patient’s body. See “— Actinic Keratosis with photodynamic therapy” below for more information. In such a trial, a confidence interval can be defined based on the distribution of values among all patients. The p-value is then calculated based on the difference between the average results of the two clinical groups and the size of the confidence intervals. A p-value of <0.05 is considered a significant result; however, at this level the FDA requires two independent trials to verify the result. The FDA may waive the requirement of a second trial if the first trial was excellent in all respects, including a higher p-value.

 

Actinic Keratosis

 

We evaluated the efficacy and safety of Ameluz® in combination with photodynamic therapy to treat mild and moderate actinic keratosis lesions on the face/forehead and/or bald scalp, using a narrow spectrum (red light lamp) light source in three pivotal, randomized, multicenter clinical Phase 3 trials (Trials 1, 2, and 3). Trial 1 was double-blind with respect to vehicle and observer-blind regarding the active comparator arm. Trials 2 and 3 were vehicle-controlled and double-blind. Each of these clinical trials included a follow-up assessment after 6 and 12 months.

 

In these trials, 212 patients with 4 to 8 mild to moderate actinic keratosis lesions on the face/forehead and/or bald scalp were treated with Ameluz® and a narrow spectrum red light source. Patients ranged from 49 to 87 years of age (with a mean of 71 years), and 92% had Fitzpatrick skin type I (always burns, never tans), Fitzpatrick skin type II (usually burns, tans minimally), or Fitzpatrick skin type III (sometimes mild burn, tans uniformly). No patients had Fitzpatrick skin type V (very rarely burns, tans very easily) or VI (never burns, always tans). Approximately 86% of the patients were male, and all of the patients were Caucasian.

 

All sessions were comprised of lesion preparation to roughen the surface and remove crusts, application of Ameluz® with occlusion for 3 hours, and removal of the residual gel. Subsequently, the entire treatment area was given photodynamic therapy; it was illuminated with a narrow spectrum red light source, a lamp of either 630 nm or 633 nm, and a light dose of approximately 37 J/cm2. In Trial 3, illumination of the treatment area was performed with our BF-RhodoLED® lamp, a narrow spectrum red light source, around 635 nm, and a light dose of approximately 37 J/cm2.

 

In all trials, the lesions that were not completely cleared 12 weeks after the initial treatment were treated a second time with an identical regimen. In the trials, 42% (88/212) of the patients treated with Ameluz® needed a second photodynamic therapy.

 

The primary endpoint for all trials was complete clearance of all of a patient’s lesions 12 weeks after the last photodynamic therapy.

 

Trial 1 was performed in Germany, Austria and Switzerland. Trials 2 and 3 were performed in Germany. The results of Trials 1, 2 and 3 as shown in the U.S. package inserts, or USPI, are presented in Table 2.

 

Table 2: Complete clearance 12 weeks after the last narrow spectrum photodynamic therapy in patients with actinic keratoses

 

    Narrow Spectrum photodynamic therapy
    Ameluz®   Vehicle
Trial 1   106/125 (85%)   5/39 (13%)
Trial 2   27/32 (84%) *   2/16 (13%) *
Trial 3   50/55 (91%)   7/32 (22%)

 

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*In the EU product information, the EMA reviewers considered one less patient as part of the ITT population, such that in the European product information the clearance rate of Trial 2 is shown as 87%. The FDA reviewers’ position was that the ITT population includes all subjects randomized to treatment, whether or not they have had any post-baseline assessments, and included one more patient in the Ameluz® and the vehicle groups.

 

Patients who achieved complete clearance at 12 weeks after the last photodynamic therapy entered a 12-month follow-up period. In the three trials, patients who received Ameluz® with the narrow spectrum photodynamic therapy and achieved complete clearance 12 weeks after the last photodynamic therapy, had recurrence rates of 14%, 11%, and 25% in Trials 1, 2 and 3, respectively, at 6 months, and recurrence rates of 40%, 22%, and 37% in Trials 1, 2 and 3, respectively, at 12 months. Recurrence was defined as the percentage of patients with at least one recurrent lesion during the 6-month or 12-month follow up period in patients with completely cleared lesions 12 weeks after the last photodynamic therapy.

 

Trial 1

 

In Trial 1, a randomized, observer blinded clinical trial with 571 patients and a follow-up duration of 6 months and 12 months, photodynamic therapy with Ameluz® was tested for non-inferiority to Metvix and superiority over placebo. The red light sources were either narrow spectrum lamps (Aktilite CL 128 or Omnilux photodynamic therapy) or lamps with a broader and continuous light spectrum (Waldmann photodynamic therapy 1200 L, or Hydrosun Photodyn 505 or 750). The primary endpoint was complete patient clearance 12 weeks after the last photodynamic therapy on average with all lamp types. Ameluz® (78.2%) was significantly more effective than MAL (64.2%, [97.5%- confidence interval: 5.9; ∞], P<0.05) and placebo (17.1%, [95%-confidence interval: 51.2; 71.0], P<0.05). Total lesion clearance rates were higher for Ameluz® (90.4%) compared to MAL (83.2%) and placebo (37.1%). Clearance rates and tolerability were dependent on the illumination source. The following table presents the efficacy and the adverse reactions transient pain and erythema occurring at the application site during photodynamic therapy with different light sources.

 

Table 2a: Efficacy and adverse reactions (transient pain and erythema) occurring at the application site during photodynamic therapy with different light sources for the treatment of actinic keratosis

 

Light  Medicinal  Total
patient
clearance
   Application site erythema (%)   Application site pain (%) 
source  product  (%)   mild   moderate   severe   mild   moderate   severe 
Narrow   Ameluz®   85    13    43    35    12    33    46 
Spectrum  MAL   68    18    43    29    12    33    48 
Broad   Ameluz®   72    32    29    6    17    25    5 
Spectrum  MAL   61    31    33    3    20    23    8 

 

Clinical efficacy was re-assessed at follow-up visits 6 months and 12 months after the last photodynamic therapy. Recurrence rates after 12 months were slightly better for Ameluz® (41.6%, [95%-confidence interval: 34.4; 49.1]) as compared to MAL (44.8%, [95%-confidence interval: 36.8; 53.0]) and dependent on the light spectrum used for illumination, in favor of narrow spectrum lamps. The probability of a patient to be completely cleared 12 months after the last treatment was 53.1% or 47.2% for treatment with Ameluz® with narrow spectrum lamps or all lamp types, respectively, and 40.8% or 36.3% for treatment with MAL with narrow spectrum lamps or all lamp types, respectively. The probability of patients in the Ameluz® group to require only one treatment and remain completely cleared 12 months after the photodynamic therapy treatment was 32.3% that of patients in the MAL group 22.4% on average with all lamps.

 

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Trial 2

 

In Trial 2, Ameluz® was compared with placebo treatment in a randomized, double-blind clinical trial enrolling 122 patients. The red light source used was either a narrow spectrum, around 630 nm at a light dose of 37 J/cm2 (Aktilite CL 128), or a broader and continuous spectrum, in a range between 570 and 670 nm, at a light dose of 170 J/cm2 (Photodyn 750). The primary endpoint was complete patient clearance 12 weeks after the last photodynamic therapy. Photodynamic therapy with Ameluz® (66.3%) was significantly more effective than with placebo (12.5%, p < 0.0001). Total lesion clearance was higher for Ameluz® (81.1%) compared to placebo (20.9%). Clearance rates and tolerability were dependent on the illumination source, with the narrow spectrum light source being more effective. Clinical efficacy was maintained during the follow-up periods of 6 months and 12 months after the last photodynamic therapy. The probability of a patient being completely cleared 12 months after the last photodynamic therapy was 67.5% or 46.8% for treatment with Ameluz® with narrow spectrum lamps or all lamp types, respectively.

 

Table 2b: Efficacy and adverse reactions (transient pain and erythema) occurring at the application site during photodynamic therapy with different light sources for the treatment of actinic keratosis

 

Light  Medicinal  Total patient  Application site erythema (%)   Application site pain (%) 
source  product  clearance (%)  mild   moderate   severe   mild   moderate   severe 
Narrow Spectrum  Ameluz®  84
(87 in EU product information)*
   26    67    7    30    35    16 
Broad Spectrum  Ameluz®  53   47    19    0    35    14    0 

 

* See footnote to Table 2 above.

 

Trial 3

 

In Trial 3, one entire tube of Ameluz® was used for each photodynamic therapy session on skin areas with field cancerization containing several actinic keratosis lesions. A total of 87 patients were treated with one PDT using Ameluz® or vehicle, which was repeated if residual lesions remained. Illumination was performed with our BF-RhodoLED® lamp. Complete patient clearance 12 weeks after the last photodynamic therapy was 91% in the Ameluz® group and 22% in the vehicle group, respectively (p < 0.0001). The clearance rate for patients with lesions on the face was 97% while the clearance rate for patients with lesions on the scalp was 82%. Lesion clearance rates were 94% 12 weeks after the last photodynamic therapy, of which 6% were recurrent at 6 months after the last photodynamic therapy, and an additional 3% (a total of 9%) were recurrent at 12 months after the last photodynamic therapy. The clearance rate for patients with mild lesions only was 99%, while the clearance rate for patients with moderate lesions was 92%.

 

In this Trial, by testing larger skin areas, we could also investigate the effect of photodynamic therapy on skin impairment. The proportion of patients with impaired skin surface, including rough, dry and scaly skin, decreased from 85% to 28% within 12 months after treatment with Ameluz®. Patients with skin hyperpigmentation or hypopigmentation decreased from 59% to 24% and from 46% to 11%, respectively. The proportion of patients with mottled pigmentation, mixed hyperpigmentation and hypopigmentation, decreased from 48% to 18%. Before treatment, 26% of the patients had mild scarring, this decreased to 7% of patients after treatment. Atrophic skin was diagnosed in 31% of patients before treatment, but only in 4% of patients 12 months after treatment.

 

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Table 3: Skin quality parameters in the treated area during 12- month follow-up

 

      Ameluz®   Vehicle 
Type of skin
impairment
  Severity  Before
photodynamic
therapy
   12 months after
photodynamic
therapy
   Before
photodynamic
therapy
   12 months after
photodynamic
therapy
 
Roughness/  None   15%   72%   11%   58%
dryness/  Mild   50%   26%   56%   35%
scaliness  Moderate/severe   35%   2%   33%   8%
Hyper-  None   41%   76%   30%   62%
pigmentation  Mild   52%   24%   59%   35%
   Moderate/severe   7%   0%   11%   4%
Hypo-  None   54%   89%   52%   69%
pigmentation  Mild   43%   11%   44%   27%
   Moderate/severe   4%   0%   4%   4%
Mottled or  None   52%   82%   48%   73%
irregular  Mild   44%   17%   41%   15%
pigmentation  Moderate/severe   4%   2%   11%   12%
Scarring  None   74%   93%   74%   89%
   Mild   22